Pound Sterling had a slight bounce back as the UK Office for Budget Responsibility announced a decrease in the fiscal gap from £30 billion to £20 billion. However, weak economic data from the UK raises the possibility of another interest rate cut by the Bank of England. Currently, the Pound is trading 0.4% lower, around 1.3130 against the US Dollar, during the European session. At the same time, the US Dollar Index gains 0.15%, reaching about 99.35. The US Dollar may come under pressure as the market expects delays in key economic data releases. The Bureau of Labor Statistics will soon share an updated schedule. Traders have tempered their optimism for a lenient Fed policy in December due to inflation concerns voiced by Fed officials.

UK Economic Developments

UK economic updates offer slight support to the British currency, but challenges remain. UK gilt yields fell modestly after news of plans to remove tax band increases. The fiscal outlook of the UK economy has improved somewhat, with 10-year gilt yields dropping to 4.51%. Expectations for a dovish stance from the Bank of England are strengthened by weak employment and GDP data, with unemployment rising to 5%. Pound Sterling’s performance appears weak compared to other major currencies, such as the New Zealand Dollar. It trades below the 200-day EMA, indicating a bearish trend against the US Dollar. Technical indicators point to important support and resistance levels for future price movement. UK gilt yields continue to affect the currency’s performance, reflecting interest rates and inflation expectations. We expect continued downward pressure on the Pound Sterling against the US Dollar in the coming weeks. The primary factor is the differing outlooks of the Bank of England, hinting at a rate cut, and the US Federal Reserve, which is cautioning about inflation. This policy mismatch is likely to continue favoring the US Dollar. The weak economic data from the UK supports our bearish view on the Pound. The recent rise in unemployment to 5% and a quarterly GDP growth of only 0.1% raises concerns, putting the economy on a path similar to the stagnation seen in late 2020. This could make a December interest rate cut from the Bank of England very likely.

US Dollar Outlook

In contrast, the US Dollar gains support from a hawkish Federal Reserve. The latest US inflation data shows the Consumer Price Index remains high at 3.4% year-over-year, highlighting ongoing inflation challenges. This suggests that the Fed is unlikely to ease its policy in December, thereby strengthening the dollar. However, there is considerable uncertainty in the short-term outlook for the US Dollar. Delayed economic data releases from the US Bureau of Labor Statistics, due to the government shutdown, leave the market somewhat blind to key information. Be ready for sharp and unpredictable movements once this delayed data is finally released. In the UK, the upcoming Autumn Budget on November 26 adds to concerns for the Pound. Reports suggest the government might avoid tax hikes to bridge the fiscal gap, which could lead to increased borrowing. This action could raise UK gilt yields and further shake investor confidence in the British currency. In this environment, it is prudent to prepare for further weakness in the GBP/USD pair. Buying put options with strike prices near the critical 1.2700 support level could be a good way to profit from a continued decline. Additionally, selling out-of-the-money call options above the 1.3300 resistance may also be an effective strategy to generate income. The upcoming major data releases indicate we should brace for increased market volatility. Key events, including next week’s UK inflation report and the eventual release of the delayed US jobs data, will likely be major catalysts for price movement. Current option premiums may not accurately reflect this upcoming risk, suggesting that purchasing volatility could be a smart move. Create your live VT Markets account and start trading now.

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