Pound Sterling plunges as Trump trades intensify
- The Pound Sterling plunges against the US Dollar as Trump wins in North Carolina and leads in other swing states.
- Trump’s victory could significantly dent the UK’s economic growth.
- Investors see the Fed and the BoE cutting interest rates by 25 bps on Thursday.
The Pound Sterling (GBP) plummets to near 1.2850 against the US Dollar (USD) in early London trading hours on Wednesday. The GBP/USD pair faces an intense sell-off as investors rush to the so-called ‘Trump trades’ after various exit polls showed Republican candidate Donald Trump having a clear lead over Democratic rival Kamala Harris in the US presidential election.
According to the Associated Press, Trump has been announced as a winner in key swing state North Carolina and is also leading in the other six swing states: Pennsylvania, Michigan, Georgia, Arizona, Nevada and Wisconsin.
The impact of Trump leading election polls is clearly visible in risk-sensitive currencies, which are significantly down against the US Dollar. Meanwhile, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, posts a fresh four-month high at around 105.30.
Risk-perceived currencies have been hit hard as investors expect higher import tariffs in Trump’s administration, which will significantly impact exports of United States (US) close trading partners. Trump also promised lower corporate taxes if he wins, which would allow the Federal Reserve (Fed) to maintain a hawkish interest rate guidance.
Apart from the US presidential election, investors will also focus on the Fed’s monetary policy meeting, scheduled on Thursday. The Fed is widely anticipated to cut interest rates by 25 basis points (bps) to 4.50%-4.75%. Therefore, investors will pay close attention to the Fed’s commentary on interest rate guidance.
Daily digest market movers: Pound Sterling is sidelined ahead of BoE meeting
- Except against the US Dollar, the Pound Sterling exhibits a mixed performance compared to its major peers on Wednesday. The British currency is expected to trade sideways, with investors focusing on the Bank of England’s (BoE) interest rate decision, which will be announced on Thursday. The BoE is expected to cut interest rates by 25 bps to 4.75%. This would be the second interest rate cut this year. The BoE started its policy-easing cycle with a usual rate cut of 25 bps on August 1.
- Investors expect the BoE rate cut decision to be a 7-0 vote split, while the other two Monetary Policy Committee (MPC) members are expected to support leaving interest rates unchanged at their current levels.
- Investors will pay close attention to BoE Governor Andrew Bailey’s press conference to know the impact of the United Kingdom (UK) budget for FY2025 on the inflation outlook and the monetary policy action in December. There would also be some questions about the impact of Trump’s victory on the UK economy if he wins or remains in the lead by then.
- According to economists at the National Institute of Economic and Social Research (NIESR), the UK economic growth would be just 0.4% if Trump’s tariff plans were implemented. The agency also sees a slower Gross Domestic Product (GDP) growth at 1.2% next year and 1.1% in 2026, even without Trump’s tariffs, Reuters reported.
Technical Analysis: Pound Sterling dives to near 200-day EMA
The Pound Sterling dives to an 11-week low near 1.2850 against the US Dollar, which aligns with the 200-day Exponential Moving Average (EMA). The GBP/USD pair faced significant offers after a mean-reversion move to near the 50-day Exponential Moving Average (EMA), which trades around 1.3000.
The Cable has also delivered a Rising Channel breakdown on a daily timeframe, suggesting that a bearish reversal has been triggered.
The 14-day Relative Strength Index (RSI) falls back below 40.00, suggesting that the bearish momentum has resumed.
Looking down, the round-level support of 1.2800 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the psychological figure of 1.3000.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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