British Pound weakens to near 1.3400 ahead of US midterm elections

The GBP/USD exchange rate slipped to a near 1.3400 level on Tuesday, marking the end of a four-day winning streak in early Asian trading hours. Market participants may become cautious as the week unfolds with several key catalysts, including the US midterm elections, the Bank of England's interest rate decision, and US September jobs data.

The US midterm elections could bring a narrative shift towards inflation and deficit concerns. Current projections suggest Democrats gaining control of the House, while the control of the Senate remains uncertain. If Democrats hold both chambers, investors might expect stricter regulations on Artificial Intelligence, potentially putting pressure on financial markets.

Conversely, if Republicans maintain control of the Senate, the fiscal outlook for the US may have mixed implications. Economists predict the Bank of England will raise the Bank Rate to 4.0% from 3.75% at their November policy meeting, marking the first increase since August 2023. Analysts will pay close attention to the BoE Governor Andrew Bailey's remarks during the press conference, as hawkish comments could bolster the British Pound against the US Dollar.

Strategists at Brown Brothers Harriman suggest the Bank of England's upcoming decision and Monetary Policy Report are expected to signal the start of a new tightening phase. They anticipate a 25 basis points hike to 4.00% following a year of inaction. However, they caution that the guidance and updated Monetary Policy Report may challenge market expectations for a total of 100 basis points of tightening over the next twelve months.

Fed Chair Jerome Powell delivered a hawkish message, indicating at least two more quarter-point rate hikes and no meeting absences, reinforcing a moderate and restrictive approach until inflation returns to 2%. The FXS Fed Sentiment Index increased to 143.62, firmly in the hawkish range, indicating markets' interpretation of the Fed's message as signaling further policy action, which typically supports the Dollar against the Euro and Yen.

The Pound Sterling, the oldest currency globally, is the fourth most traded currency in the foreign exchange market, accounting for around 12% of all transactions, with an average daily volume of $630 billion as of 2022 data. Its primary trading pair, GBP/USD, makes up 11% of the total FX volume. The Bank of England's monetary policy decisions, driven by the goal of maintaining price stability (around 2% inflation), significantly impact the Pound's value.