Pound Sterling moves higher amid uncertainty over US election outcome

• The Pound Sterling moves higher against the US Dollar with US elections getting underway.
• Investors expect the Fed and the BoE to cut interest rates by 25 bps on Thursday.
• Market participants still assess the impact of the UK budget announcements on the country’s inflation outlook.

The Pound Sterling (GBP) gains slightly to near 1.2980 against the US Dollar (USD) in Tuesday’s North American session. The GBP/USD pair rises as the United States (US) presidential elections begin. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, falls slightly to near 103.80.

The Greenback went through a significant unwinding of long positions after the Des Moines Register/Mediacom Poll showed that current Vice President Kamala Harris leads former President Donald Trump by three points in Iowa, the state where Trump won clearly in 2016 and 2020. The US Dollar had a strong run-up in October as traders were pricing in Trump’s victory, given his preference for protectionist policies is expected to support the Greenback’s valuation.

Trump has vowed to levy a universal 10% tariff on all economies, except China – which is expected to face much higher duties – if he wins the presidential election. In addition to that, he also promised to lower corporate taxes, which would likely result in a high inflationary environment.

The US presidential election is the main event this week. However, investors will also focus on the Federal Reserve’s (Fed) monetary policy decision, which will be announced on Thursday. According to the CME FedWatch tool, the central bank is widely anticipated to cut interest rates by 25 basis points (bps) to 4.50%-4.75%. This will be the second interest rate cut by the Fed in a row. However, the size of the cut will be smaller after policymakers voted for a 50 bps rate cut in September.

Daily digest market movers: Pound Sterling to be influenced by BoE policy decision

• The Pound Sterling trades broadly unchanged against its major peers, with investors focusing on the Bank of England’s (BoE) policy meeting on Thursday. The BoE is expected to cut interest rates by 25 basis points (bps) to 4.75%. This would be the second interest rate cut of the year. Seven Monetary Policy Committee (MPC) members are expected to vote for further policy easing, while the remaining two will likely support keeping rates steady.
• BoE external member Catherine Mann is expected to be one of two members who would vote to keep interest rates at their current levels. In a panel discussion at the sidelines of International Monetary Fund (IMF) meetings on October 24, Mann – an outspoken hawk – welcomed the release of the soft inflation data but emphasized the need for more slowdown. “In order to get to a target consistent with a 2% inflation rate, services (inflation) still have a long way to go,” Mann said. When asked about her current interest rate stance, Mann said that rate cuts are premature at this stage.
• Apart from the interest rate decision, investors will look for any comment from the BoE about the impact of the UK Autumn Forecast Statement – unveiled by UK Chancellor of the Exchequer Rachel Reeves last week – on monetary policy and the inflation outlook. After the budget announcement, the Office for Business Responsibility (OBR) said that the announced fiscal measures are both pro-growth and inflationary.