Pound Sterling refreshes almost three-month low against US Dollar ahead of Fed's monetary policy

• The Pound Sterling declines to near 1.3230 against the US Dollar, the lowest level seen in almost three months.
• Investors expect the Fed to cut interest rates by 25 bps to the 3.75%-4.00% range.
• UK Chancellor Reeves might raise taxes on households and cut spending in the upcoming budget.

The Pound Sterling (GBP) posts a fresh almost three-month low at around 1.3230 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair slumps as the US Dollar Index (DXY) trades higher ahead of the Federal Reserve's (Fed) monetary policy announcement at 18:00 GMT and the continued underperformance from the British currency. At the time of writing, the US Dollar Index trades 0.2% higher to near 99.00.

Investors keenly await the Fed's policy announcement to get cues on the interest rate outlook, while remaining confident that the United States (US) central bank will reduce borrowing rates for the second time in a row.

According to the CME FedWatch tool, traders have fully priced in a 25-basis-point (bps) reduction in interest rates that will push them lower to the 3.75%-4.00% range. The tool also shows that traders are confident the Fed will reduce interest rates again in the December policy meeting.

Cooling US inflation, a soft job market, and the ongoing federal shutdown are major factors behind firm Fed dovish bets. On Tuesday, Democratic leader Chuck Schumer in the US Senate stated that the ongoing government shutdown would extend to November.

"On November 1, people in more than 30 states are going to be aghast - aghast - when they see their bills, and they're going to cry out. And I believe there will be increased pressure on Republicans to negotiate with us," Schumer told reporters, Reuters reported.

Daily digest market movers: Pound Sterling underperforms its major peers

• The Pound Sterling continues underperforming against its major currency peers on Wednesday as investors expect United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves to face difficult choices about where to increase taxes and cut spending in the upcoming Autumn Budget.
• A report from Citi showed on Tuesday that the Labour Party would raise taxes on consumers against increasing corporation tax or increasing employers' contribution to social security schemes to fund its fiscal contraction of almost £30-35 billion. The report also showed that UK Chancellor Reeves could increase the dividend tax rate to 16%-17% from 8.75%, and implement new duties on sugar and gambling.
• The scenario of increasing taxes on households could dampen market sentiment, which would weigh on overall consumer spending.
• On the monetary policy front, investment bank firm Goldman Sachs now expects the Bank of England (BoE) to cut interest rates by 25 basis points (bps) to 3.75% at its monetary policy meeting next week. The investment banking firm turns dovish for November's policy due to the softening labor market.
• Contrary to Goldman Sachs' anticipation, a recent Reuters poll has shown that the BoE will not cut interest rates in the last quarter of the year. The poll also showed that the central bank will cut borrowing rates in the first quarter of 2026.

Technical Analysis: Pound Sterling slides further to near 1.3230

The Pound Sterling extends its downside move against the US Dollar to near 1.3230 on Wednesday. The overall trend of the GBP/USD pair has turned bearish as it slides below the 200-day Exponential Moving Average (EMA), which trades at around 1.3295.

The 14-day Relative Strength Index (RSI) falls below 40.00. A fresh bearish momentum would emerge if the RSI holds below that level.

Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.