Pound Sterling Declines Ahead of Fed Decisions and Budget

On Tuesday the pound sterling weakened against the US dollar amid the strengthening of the American currency. This happened before the Federal Reserve meeting scheduled for Wednesday and the publication of the UK budget on the same day.

By 12:57 Moscow time the pound lost 0.19% and traded at 1.3317 dollars. The euro rose 0.27% to 1.1143 dollars at the same time. The strengthening of the dollar was supported by the stabilization of sentiment in the artificial intelligence sector and expectations of a tougher Fed policy.

ING strategist Francesco Pesole noted that confirmation of commitment to fighting inflation from Fed Chair Kevin Warsh adds structural support to the dollar. On Tuesday data on the Conference Board consumer confidence index, durable goods orders, new home sales and the Richmond Fed index were also expected. ING forecasts the confidence index at 81.5.

HSBC pointed out that the pound is lagging behind most major currencies, showing the greatest weakness against the New Zealand dollar. Additional pressure is created by the UK budget. Markets expect restrained statements from Chancellor John Healy, and possible investments of around 20 billion pounds over five years could reduce risks.

Markets are pricing in a 25 basis point rate hike by the Bank of England to 4% in November. ING believes the pound is undervalued by 1–1.5% due to the situation in France, but a significant drop requires a substantial widening of the spread on French bonds. The LSEG consensus forecast assumes a GBP/USD rate of 1.33 in the fourth quarter. HSBC sees support for the pair at 1.3175 and resistance at 1.3461.