British Pound trades lower near 1.3400 as US midterm elections approach

• GBP/USD eases towards 1.3405 as Tuesday’s Asian session gets under way.
• A Democratic victory in the House of Representatives is widely anticipated.
• Thursday’s November BoE meeting is expected to bring a Bank Rate increase to 4.0%.

At around 1.3405 in early Asian trading on Tuesday, GBP/USD is retreating, bringing its four-day run of gains to an end. With the US midterm elections, the Bank of England (BoE) interest rate decision and September US employment figures all due this week, markets may adopt a more cautious stance.

Inflation and concerns over the deficit could return to the centre of the market debate following the US midterm elections. As traders assess how the results may influence the outlook, current forecasts favour a Democratic victory in the House, although the outcome in the Senate remains less certain.

According to economists from Reuters, investors anticipate tighter regulation and oversight of Artificial Intelligence (AI) if Democrats secure both the House and Senate. Such an outcome could put pressure on financial markets.

A Democratic House alongside a Republican-controlled Senate would probably have mixed implications for the US fiscal outlook. By contrast, a Republican sweep could, investors expect, prompt the administration to pursue additional tax reforms or higher defence spending, potentially adding to the country’s already sizeable budget deficit.

A rise in the Bank Rate from 3.75% to 4.0% at Thursday’s November policy meeting is the expectation of economists surveyed by Reuters. It would mark the BoE’s first increase since August 2023, when inflation was still above its 2% target. For further indications of the UK rate outlook, traders will scrutinise the accompanying press conference. Hawkish remarks from BoE Governor Andrew Bailey could lend some support to the British Pound (GBP) against the US Dollar (USD).

BoE expected to begin tightening, with guidance potentially limiting Pound gains

Thursday’s Bank of England policy announcement and Monetary Policy Report are widely anticipated to signal a fresh tightening cycle, according to strategists at Brown Brothers Harriman. They describe the BoE as “widely expected to start tightening with a 25bps hike to 4.00% after standing pat all year.” Citing the backdrop, they say “firmer UK inflation and economic activity back the move,” and expect a “vote split…seen at 7-2 with doves Alan Taylor and Swati Dhingra supporting a hold.”

The extent of subsequent tightening remains a key question, however. BBH warns that “BoE guidance and the updated MPR will test market expectations for 100bps of tightening over the next twelve months.” The strategists argue that “persistent spare capacity across the forecast horizon would strengthen the case for pricing out hikes and limit GBP upside,” implying that any initial support for the Pound from a rate rise could be tempered by a wider policy message that challenges the market’s more aggressive assumptions about the rate path.

Logan’s call for further Fed hikes leaves Dollar bulls in charge

An FXS Speechtracker score of 8/10, modestly above the historical average of 7.7/10, highlights the distinctly hawkish tone of Fed’s Logan and a firmer position than the established baseline. Against a backdrop of robust growth, resilient consumer spending and a labour market ranging from balanced to tightening, the assertion that the Fed “needs at least two more quarter-point rate hikes” reinforces a commitment to keeping policy “modestly restrictive” until inflation is clearly on course to return to 2%. Logan also stresses that passing over a meeting would not alter the eventual policy destination. The focus on gradual adjustments and clear communication points to a preference for steady tightening, giving households, businesses and investors time to adapt and maintaining a supportive setting for the Dollar.

A 0.95-point increase took the FXS Fed Sentiment Index to 143.62, leaving it firmly in hawkish territory and in line with the above-baseline FXS Speechtracker reading. The rise confirms that markets view Logan’s comments as pointing to further policy action, a setting that typically supports the Dollar against the Euro and Yen.

Technical Analysis: GBP/USD Maintains a Positive Bias Above the 100-day SMA

Trading above both the 20-period Bollinger middle band and the 100-day simple moving average (SMA), GBP/USD retains a bullish short-term bias on the daily chart. The pair is pushing into the upper half of the Bollinger envelope, with the Relative Strength Index (14) around 58 indicating positive momentum without reaching overbought levels. This suggests buyers remain in control while the pair holds above those key moving-average supports.

The upper Bollinger band around 1.3465 presents the nearest resistance; a loss of buying pressure there could lead gains to stall or reverse. Below the market, the first support lies at the 100-day SMA near 1.3385, ahead of the Bollinger middle band around 1.3318. A more pronounced retreat would probably find support before reaching the lower Bollinger band near 1.3175.

(The technical analysis of this story was written with the help of an AI tool. Know more.)