British Pound slips to around 1.3400 as US midterm elections approach

• Selling pressure takes GBP/USD towards 1.3405 during early Asian trading on Tuesday.
• Expectations broadly favour a Democratic victory in the House of Representatives.
• A rise in the Bank Rate to 4.0% is likely at the BoE’s November meeting on Thursday.

A retreat towards 1.3405 ends GBP/USD’s four-day run of gains in Tuesday’s early Asian session. With a busy week of catalysts ahead, markets may adopt a cautious stance. The US midterm elections, the Bank of England (BoE) interest rate decision and US September jobs data are all on the agenda.

Inflation and deficit concerns could return to the centre of the broader market narrative as the US midterm elections unfold. How the results affect the market outlook will be a key consideration for traders. Forecasts currently favour a Democratic win in the House, though the outcome for control of 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 divided Congress, with Democrats taking the House and Republicans holding the Senate, would likely have a mixed effect on the US fiscal outlook. By contrast, investors expect that a Republican sweep may prompt the administration to pursue additional tax reforms or raise defence spending. Either could widen the country’s already sizeable budget deficit.

At Thursday’s November policy meeting, the BoE is expected to increase the Bank Rate from 3.75% to 4.0%, according to economists surveyed by Reuters. If delivered, this would be the first rate increase since August 2023, when inflation remained above the BoE’s 2% target. For further indications of the UK interest rate outlook, traders will scrutinise the press conference. Hawkish remarks from BoE Governor Andrew Bailey could lend some support to the British Pound (GBP) against the US Dollar (USD).

Could BoE Guidance Restrain Pound Gains as a Tightening Cycle Begins?

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.” In support of that view, they note that “firmer UK inflation and economic activity back the move,” while expecting 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,” indicating that an initially Pound-supportive increase could be followed by guidance that moderates the market’s more aggressive rate expectations.

Can Logan’s Call for Further Fed Hikes Keep Dollar Bulls in Charge?

Dollar sentiment receives support from a clearly hawkish message by the Fed’s Logan. An FXS Speechtracker reading of 8/10 stands slightly above the historical average of 7.7/10, indicating a tougher position than the established baseline. Logan’s insistence that the Fed “needs at least two more quarter-point rate hikes”, alongside the view that skipping a meeting leaves the policy destination unchanged, highlights a commitment to keeping policy “modestly restrictive” until inflation is clearly moving back towards 2%. Strong growth, robust consumer spending and a labour market ranging from balanced to tightening reinforce that stance. The focus on gradual moves and clear communication points to a preference for steady tightening that gives households, businesses and investors time to adjust, sustaining a favourable backdrop for the Dollar.

A 0.95-point increase took the FXS Fed Sentiment Index to 143.62, placing it firmly in hawkish territory and aligning with the above-baseline FXS Speechtracker reading. The index’s advance confirms that markets view Logan’s comments as pointing to more policy action ahead. Such conditions typically support the Dollar against the Euro and Yen.

Technical Analysis: Can GBP/USD Maintain Its Positive Bias Above the 100-day SMA?

Buyers retain the near-term advantage on the daily GBP/USD chart, with spot trading above the 20-period Bollinger middle band as well as the 100-day simple moving average (SMA). While the price pushes into the upper half of the Bollinger envelope, a Relative Strength Index (14) reading of about 58 points to positive momentum without overbought conditions. This suggests buyers remain in control provided the pair holds above its key moving average supports.

The upper Bollinger band, near 1.3465, presents the first resistance level. Should buying interest weaken there, the advance could stall or reverse. Initial downside support lies around 1.3385 at the 100-day SMA, ahead of the Bollinger middle band near 1.3318. A sharper retreat would likely find support before reaching the lower Bollinger band around 1.3175.

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