GBP/USD stabilized after a 0.90% drop due to UK finance minister Rachel Reeves’ warnings about tax hikes to achieve fiscal goals. The pair is currently trading at 1.3028, remaining unchanged as traders remain cautious. The Bank of England (BoE) is expected to keep rates steady, with some predicting a rate cut by year-end due to soft inflation data. In the US, strong economic indicators are emerging. The ISM Services PMI rose from 50 to 52.4 in October, and Prices Paid increased to 70. Additionally, the ADP Employment Change report showed an increase of 42,000 non-farm jobs, beating the forecast of 25,000. As a result, the likelihood of a Federal Reserve rate cut in December has decreased from 68% to 64%.

Technical Outlook on GBP/USD

From a technical perspective, GBP/USD may face further declines. It dropped below the 200-day Simple Moving Average at 1.3254. If it goes below 1.3000, it could approach the April 8 low of 1.2708. However, if it breaks above 1.3100, it may test this week’s high at 1.3139. Notably, the British Pound showed strength against the New Zealand Dollar this week, despite market fluctuations. There is considerable pressure on the Pound after the UK finance minister’s warning about possible tax hikes. This raises concerns about fiscal tightening, leading to challenges for the currency, particularly as it struggles to maintain the 1.3030 level. We see this as a clear bearish shift in sentiment for the coming weeks. The latest CPI reading for October stood at just 2.1%, suggesting that the Bank of England could consider cutting rates in December. This soft inflation, along with widening public deficit figures, puts the BoE in a tough situation. This increases the appeal of derivatives that benefit from falling UK interest rate expectations.

Implications of US Economic Data

On the US side, the economy appears strong, with last Friday’s Non-Farm Payrolls report showing a robust addition of 195,000 jobs. This solid labor market data reduced the market’s expectation for a December Fed rate cut to just 55%, as per the CME FedWatch tool. The difference between a likely Fed rate hold and a possible cut from the BoE drives our strategy. We recall how sensitive the Pound was to fiscal policy changes in late 2022, and these new warnings are triggering similar concerns in the market. While the current situation differs, the fear of a policy error harming growth remains. Historical patterns suggest that further discussions about tax increases could lead to another sharp decline. Given this outlook, we believe that positioning for further downside in GBP/USD is sensible. Buying put options with a strike price below the 1.3000 psychological level offers a defined-risk way to bet on a move toward the April lows near 1.2708. Increased volatility is anticipated around the upcoming BoE meeting, making options an appealing strategy. Create your live VT Markets account and start trading now.

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