GBP/USD is experiencing significant selling pressure, currently trading near 1.3120, marking its lowest level in a week. This movement follows a mix of weaker UK inflation data, increasing U.S. yields, and growing domestic fiscal concerns. The pound has experienced a decline for four straight sessions, pulling back from the 1.3190 highs observed earlier this month as market participants adjust their positions in anticipation of a potential rate cut by the Bank of England in December. The Office for National Statistics indicated that the headline CPI experienced a deceleration to 3.6% year-over-year in October, a decrease from 3.8% in September. Core CPI decreased to 3.4%, marking its lowest level since March 2023, while services inflation moderated to 4.5% from 4.7%. The data indicates that inflation is decreasing more rapidly than anticipated, providing the Bank of England with the opportunity to relax monetary policy for the first time since March 2020. The current pricing in money markets indicates an 85% likelihood of a 25-basis-point rate cut at the Bank of England’s meeting in December. This transition has resulted in a decrease in gilt yields and a flattening of the yield curve. The 2-year gilt yield decreased to 4.11%, a decline of nearly 20 basis points within a week, indicating an increasing belief that the period of policy tightening has concluded.
The forthcoming Autumn Budget scheduled for November 26 is intensifying pressure on the pound, as worries about fiscal credibility continue to mount. Chancellor Rachel Reeves is confronted with an expanding funding gap projected to be around £30 billion, primarily attributed to sluggish growth and diminished tax revenues. Reports indicate that the government might reconsider its proposed income tax increases, which raises concerns about potentially larger deficits. Bond traders are increasingly seeking a higher risk premium for holding UK debt. The 10-year gilt yield increased to approximately 4.30% earlier this week before declining in response to CPI data, while credit default swaps on UK sovereign debt rose to 21 basis points, marking their highest level since February. Investors express skepticism regarding the government’s ability to uphold fiscal discipline amidst the competing demands of political commitments to healthcare and infrastructure expenditures. The current uncertainty, combined with the Bank of England’s dovish stance, has positioned sterling as one of the weakest currencies among the G10 this month. The U.S. Dollar Index has risen to 105.7, influenced by assertive remarks from the Federal Reserve and decreasing expectations for imminent rate cuts. Reports indicates a 49% probability of a December cut, a decrease from 67% the previous week. Officials from the Federal Reserve, such as Thomas Barkin and John Williams, emphasized that inflation is still “off track” from the 2% target.
Initial jobless claims increased marginally to 232,000, and the ADP report indicated modest job gains, reflecting ongoing strength in the labor market. Market participants are closely monitoring the upcoming Fed minutes and Nonfarm Payrolls data scheduled for Thursday, with a consensus expectation of approximately 50,000 new jobs being added. An increase in labor figures may elevate U.S. Treasury yields further, bolstering the dollar’s strength and intensifying the downward pressure on GBP/USD, which has already seen a 0.6% decline this week. From a technical perspective, GBP/USD is currently exhibiting a confirmed downtrend. The pair has breached its short-term trendline support and is currently trading around 1.3120, approaching the 0.236 Fibonacci retracement level, which serves as a significant pivot point. Momentum indicators indicate a bearish sentiment — the Relative Strength Index is at 46, reflecting limited recovery potential, and the pair continues to trade below all significant moving averages. If sellers maintain their dominance and GBP/USD falls below 1.3100, the subsequent targets are 1.3084 and 1.3048, with the early-November cycle low at 1.3010 following closely behind. Efforts to move higher are constrained around 1.3173 (20-day SMA) and 1.3200 (psychological barrier). A decisive move above 1.3200 would necessitate a dovish stance from the Fed or an unexpectedly tight UK Budget, both of which seem improbable at this time.
Recent data indicates that speculative long positions in GBP have decreased by 19% in the past two weeks, whereas short positions have surged to a five-month peak. Hedge funds and macro funds are progressively reducing their GBP exposure as the interest-rate differential with the U.S. expands. The GBP 1-month implied volatility increased to 8.7%, indicating heightened hedging activity in anticipation of the Autumn Budget and significant U.S. data announcements. The liquidity in GBP futures has diminished, indicating that numerous traders are refraining from taking bold positions until the events of next week have transpired. Nonetheless, the risk profile appears to be tilted towards the downside, especially if U.S. yields continue to hold above 4.4%. As the BoE approaches its initial reduction, the Fed remains steadfast in its position.
The Federal Funds Rate is currently held steady within the range of 5.25% to 5.50%, whereas the Bank of England’s base rate is positioned at 5.25%. Nonetheless, the swaps markets indicate expectations of two cuts from the BoE by mid-2026, compared to just one from the Fed, thereby increasing the forward rate spread in favor of the dollar. The divergence has resulted in a decline of over 3.2% for GBP/USD month-to-date, falling from peaks close to 1.3550 in late October. Each bounce continues to be shallow, indicating that market participants are hesitant to challenge a trend supported by macro policy differences and fiscal uncertainty. Market participants are currently concentrating on significant economic indicators from both sides of the Atlantic. Friday’s PMI releases from the UK and U.S. will assess the immediate momentum in both manufacturing and services sectors. Weak UK PMIs — anticipated to stay under 50.5 — may strengthen the bearish outlook. Meanwhile, the U.S. FOMC minutes and NFP report may lead to a significant move below the 1.3100 level if both confirm the strength of the U.S. economy. The Autumn Budget scheduled for November 26 is set to be crucial. Any indication that the Treasury intends to increase borrowing may lead to intensified gilt sell-offs, potentially driving GBP/USD below 1.3050 and possibly challenging the 1.2950 mark by early December.