On Tuesday, the pound sterling traded lower against the dollar amid stabilizing sentiment in the AI sector and expectations of the Fed's decision. Pressure on the British currency increased ahead of the publication of the UK budget.
On Tuesday, the pound sterling traded lower against the dollar, and the euro also showed a decline. The strengthening of the dollar received support thanks to the stabilization of sentiment around the AI sector and investors' positioning ahead of the Federal Reserve's decision on Wednesday. At the same time, the pound was under additional pressure in anticipation of the publication of the UK budget on the same day.
As of 12:57 Moscow time, the pound sterling fell by 0.19% against the dollar, reaching the mark of 1.3317 dollars. The euro rose by 0.27% to 1.1143 dollars.
Currency strategist at ING Francesco Pesole noted that the dollar received good support at the beginning of the week. Stabilization of sentiment around the AI sector allowed markets to return to a broader favorable background associated with the Fed's hawkish stance and high energy prices. ING pointed out that the reaffirmation by Fed head Kevin Warsh of commitment to fighting inflation strengthens the structural support for the dollar.
Later on Tuesday, the publication of the consumer confidence index from the Conference Board was expected, as well as data on orders for durable goods, new home sales and the Richmond Fed index. HSBC noted that the pound fell amid the reduction of short positions on the dollar ahead of the Fed meeting. The British currency lagged behind most major currencies, showing the greatest weakness against the New Zealand dollar.
The UK budget added another layer of risk. Markets expected a restrained statement from Chancellor of the Exchequer John Healy, which created a low threshold for a negative surprise. Reports indicate that Healy may add about 20 billion pounds in investments over five years. Markets priced in a 25 basis point hike in the Bank of England rate to 4% in November.
ING believes that the pound-dollar pair is undervalued by 1.0-1.5% largely due to the situation in France. To provoke another significant decline, the spread on French bonds must widen quite substantially from 153 basis points. HSBC calls the resistance level 1.1257 dollars. The LSEG consensus forecast suggests that in the fourth quarter the GBP/USD pair will be 1.33 dollars, and EUR/USD — 1.14 dollars.