The British pound strengthened against a softer U.S. dollar on Monday, gaining 0.4% to $1.297 after its longest weekly losing streak in nearly six years. The bounce comes ahead of a pivotal week with key events such as the U.S. elections and the Bank of England’s (BoE) upcoming interest rate decision. These developments are expected to bring heightened volatility to currency markets as political and economic uncertainties build.
Last week, the pound hit a two-and-a-half-month low of $1.284 after UK Finance Minister Rachel Reeves proposed a budget focused on increased taxation, spending, and borrowing. This budget, along with the latest economic projections from the Office for Budget Responsibility (OBR), added pressure on the pound. The OBR revised its growth outlook downward beyond 2025 and raised its UK inflation forecast for 2025 to 2.6% from a prior estimate of 1.5%, which has prompted traders to scale back expectations for BoE rate cuts.
Central Bank Policy in the Spotlight
Both the BoE and the Federal Reserve are anticipated to make quarter-point rate cuts in their respective policy meetings this Thursday, with the potential for additional cuts in December. Investors are particularly focused on any commentary from BoE Governor Andrew Bailey, who may address the government’s recent budget and the BoE’s stance on interest rates. According to Jefferies’ Chief Economist for Europe, Mohit Kumar, Bailey may leave the possibility of a December cut open but could moderate his recent dovish tone.
Dollar Weakens Slightly Amid U.S. Election Uncertainty
Meanwhile, the U.S. dollar dipped to a two-week low against other major currencies. Investors appeared to take profits amid election uncertainty, with recent polling showing Vice President Kamala Harris and former President Donald Trump in a tight national race. The dollar has recently been supported by expectations of a Trump victory, as his policies are anticipated to result in higher tariffs, raising prices and potentially slowing the Federal Reserve’s easing cycle.
Sterling’s Volatility on the Rise
Market participants are bracing for increased volatility in the pound, as both the U.S. election and the BoE rate decision could influence trade policy and market sentiment. The one-week implied options volatility on the pound (GBPSWO=), a measure of investor demand for protection against large price swings, rose to 11.8%, just below the seven-month high of 12.8% seen last week. This reflects investor caution ahead of potentially impactful outcomes from both the election and BoE’s policy announcements.
With these events poised to shape currency markets, both the pound and dollar could see considerable movements as traders navigate this week’s high-stakes landscape.
