GBP/USD is trading lower at around 1.3250 as food prices in the UK decline, leading to expectations for a possible rate cut by the Bank of England. This drop in the Pound follows weaker inflation data from the British Retail Consortium. Currently, there is a 68% chance of a quarter-point rate cut by the BoE in December. This expectation is backed by the Office for Budget Responsibility’s plan to reduce the UK productivity growth forecast by 0.3 percentage points, potentially widening the fiscal gap by around £20 billion.

Chancellor Rachel Reeves Budget

Chancellor Rachel Reeves’s upcoming budget may need to tackle a £35 billion shortfall. On Tuesday, GBP/USD fell over 0.50% amid worries about the UK’s financial outlook. The pair now trades at 1.3280 after hitting a low of 1.3247, the lowest level since August. The US Dollar remains soft, with the Dollar Index down 0.10% at 98.70. During President Trump’s visit to Asia, a US-Japan alliance agreement was signed, focusing on securing essential minerals and rare earths, aligning the economic interests of both countries. The Pound Sterling is under significant pressure, with the market anticipating a Bank of England rate cut by year’s end. Recent inflation data showed a decrease to 1.8%, reinforcing this expectation. Given these circumstances, maintaining or starting bearish positions on GBP pairs might be a wise strategy in the upcoming weeks.

Chancellor’s Risk Event

The Chancellor’s budget in November, which needs to address a £35 billion shortfall, poses a considerable risk to the market. Implied volatility on GBP/USD options has risen to a three-month high, signaling market concern. Thus, buying put options could be a strategic move to benefit from potential declines while mitigating the risk of sharp price reversals. We’re also noticing increased weakness in pairs like GBP/JPY, nearing the 201.00 level. This shift isn’t just due to the Pound’s weakness; it also reflects a heightened risk-averse sentiment favoring the Japanese Yen. The rise in Gold prices to the $4,000 level yesterday further underscores this trend towards safety in global markets. While there are strong arguments for a weaker Pound, we must consider the Federal Reserve’s policy meeting later today. Current market projections via the CME FedWatch tool suggest over a 90% chance of a rate cut, which is keeping the US Dollar subdued. This situation could temporarily support GBP/USD, making short positions potentially volatile around the announcement. We’ve seen similar situations in the past, especially during financial uncertainties like the aftermath of the 2022 budget. Back then, fears about government finances led to a sudden depreciation of the Pound. The current alerts from the Office for Budget Responsibility serve as a reminder of how quickly market sentiment can change. Create your live VT Markets account and start trading now.

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