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Pound to Dollar Rate Today: 10-Week Highs Ahead of UK Business Tax Cuts

November 22, 2023 - Written by Frank Davies


The Pound US Dollar exchange rate (GBPUSD) was unable to hold a brief move above the 1.2500 level on Monday, but made further headway on Tuesday with 10-Week highs just above 1.2550 before a correction to 1.2530.

Overall risk appetite remained firmer with European equity markets at the highest level for over 5 weeks.

Firm risk conditions will tend to underpin Pound Sterling.

UK public sector net borrowing excluding public sector banks increased to £14.9bn for October 2023 from £10.5bn the previous year and the second-highest October deficit on record.

For the first seven months of fiscal 2023/24, the deficit increased to £98.3bn from £76.4bn the previous year.

This was still £16.9bn less than forecast by the Office for Budget Responsibility (OBR), although the monthly shortfall was above OBR expectations.

The OBR will release its updated projections to accompany Wednesday’s Autumn Statement.

Victoria Scholar, head of investment at interactive investor, commented; “with a General Election looming, better-than-expected government finances, Sunak’s year-end target to halve inflation already met, and the Conservatives struggling in the polls, the Chancellor may resort to some vote winning tax cuts in tomorrow’s Autumn Statement.”

There were still important reservations over the medium-term outlook.

According to Martin Beck, chief economic advisor to the EY ITEM Club "Squaring that fiscal circle appears set to be left to whoever forms the next government.”

Despite medium-term concerns, there are strong expectations that Chancellor Hunt will announce tax cuts in the Autumn Statement.

According to MUFG; “Comments at the start of this week from Prime Minister Sunak and Chancellor Hunt have strongly indicated that tax cuts are likely to be delivered for businesses and households which unless offset by spending cuts will act to reduce the BoE’s room to loosen monetary policy next year.”

As far as monetary policy is concerned, Bank of England Governor Bailey and other Monetary Policy Committee members maintained a generally hawkish stance in testimony to the Treasury Select Committee on Tuesday.

Bailey continued to warn that inflation risks were to the upside and Mann continued to back further interest rate increases.

She pointed to survey evidence that inflation pressure would remain strong in 2024.

The relatively hawkish policy stance triggered a limited increase in 2-year yields to 4.56%.

The dollar overall has remained under pressure amid expectations that the Federal Reserve will cut interest rates significantly during 2024.

As far as the US economy is concerned, the calendar remains relatively light with markets in a countdown period into Thursday’s Thanksgiving holiday.

Data releases will still be watched closely.

ING expects weak US existing home sales data for October and added; “The market looks in the mood to grab any less hawkish headlines and any signals suggesting that the Fed might be done tightening would be read negatively for the dollar.”

The US 10-year yield was around 4.41% on Tuesday and close to 2-month lows.

Federal Reserve minutes from the early-November meeting will be released on Tuesday.

According to ING; “The market seems in the mood to look out for some dovish headlines here, and this can prove a negative dollar event risk.”

In comments on Monday, Richmond Fed President Barkin stated that overall and core inflation numbers are “coming down nicely”, but he was still concerned that inflation will prove stubborn.

According to MUFG; “Overall, his comments send a cautionary signal to market participants over the risk of getting too carried away about the timing and scale of Fed cuts likely to be delivered next year.”

Markets are pricing in close to a 30% chance that rates will be cut at the March policy meeting.

The bank added; “It is unlikely that the minutes from the November FOMC meeting will materially alter those expectations, but they are also unlikely to encourage market participants to price in earlier rate cuts.”

According to Socgen; “the Dollar is now close to oversold levels and a rebound could be overdue.”

Nevertheless, from a longer-term perspective, it added; “GBP/USD is already breaking free from monetary policy expectations, an early bullish move that is due solely to November’s Dollar weakness. If the next leg comes from Sterling strength, GBP/USD could go much higher.”
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