GBP/USD Forecast: All eyes turn to the UK budget

The focus in UK markets is turning to the Autumn Budget on Wednesday and ahead of it we have seen a mild recovery in the GBP/USD, which has found support as the US dollar recovery has paused ahead of the release of US retail sales and PPI inflation data today. Consumer inflation in the UK last week came in at 3.6%, which was a tad hotter than expected but this was never going to move the needle as the focus remained on the budget and the direction of the US dollar now that the US government shutdown is over. In recent days, a few Fed officials have highlighted the weakening employment in the US as a reason to loosen policy further in December. This, though, has not materially weighed on the dollar, with the greenback finding decent support lately due to the heightened volatility in the stock and crypto markets. The September payrolls report was mixed last week, but other macro indicators from the world’s largest economy have been not so great. Will that trend continue, with the release of US retail sales and a few other macro pointers today?

 

Can the dollar extend recovery?

 

In what will be a lighter week for trading due to Thursday’s US Thanksgiving holiday, there are still a few key data releases to watch. September retail sales are due shortly, and if the figures come in as strong as expected of around +0.4% m/m for the headline and +0.3% m/m for the core, markets may find fresh justification to push the dollar higher. We also have PPI released at the same time i.e., 13:30 GMT. This is expected to show +0.2% m/m reading on the headline front. A few other macro pointers will be released later on this afternoon.

 

Traders should also keep an eye on Wednesday’s Fed Beige Book, which offers anecdotal insights from the central bank’s 12 districts. If it shows clearer signs that the employment slowdown is spreading, investors may grow more confident in the likelihood of a December rate cut.

 

Notably, a few Fed officials such as Chris Waller and Mary Daly have expressed support for a December rate cut.  New York Fed President John Williams has also recently signalled his support for another cut next month, prompting market expectations for a December move to climb back toward 75%.

 

It’s All About the UK Budget for GBP/USD forecast

 

With just a day to go until the Chancellor, Rachael Reeves, steps up for the Autumn Budget, the pound is treading carefully. Gilts have been volatile, and the pound has drifted sideways as traders weigh up the government’s fiscal credibility. The recent rise in yields isn’t entirely homegrown – global yields, especially in Japan, have also pushed higher – but UK-specific jitters have certainly played a part. Reports that the government may ditch income tax increases have only amplified concerns over how a £25 to 30 billion fiscal hole will be plugged. Reeves will need to deliver a convincing plan tomorrow; if she doesn’t, UK assets could face a rough ride.

 

GBP/USD forecast: Technical levels to watch

 

 

Despite the mild recovery, the GBP/USD chart remains in a short-term bear trend as defined by the lower lows and lower highs. So it remains to be seen whether the cable will be able to climb back above the pivotal levels of 1.3140. This level had served as a double bottom earlier in the year before finally cracking in early November, and since then the pair has hovered around this region without making any decisive move away from it. If the bulls can reclaim this shelf, then that would boost the GBP/USD forecast from a technical point of view. In that case, the next upside markers sit at 1.3200 and 1.3250. But a clean break lower would quickly expose 1.3050 and then the psychological 1.3000 handle. For now, momentum feels indecisive, so watch price action closely to see which direction is the more likely outcome, before deciding on any trades.  In truth, a lot will be determined on Friday by the UK budget announcement.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R