Photo by Steve Smith on Unsplash
 

This morning’s release of UK CPI data revealed that inflation was stronger than expected at 3.6% but still fell from 3.8% recorded the month before. Food inflation was particularly strong which may keep the hawks at the Bank of England’s MPC vocal at their December meeting. In truth, CPI was never going to be super important for the GBP/USD, given that all the focus is on next week’s key UK budget. Meanwhile from the US, September’s delayed payrolls report will be released on Thursday before the focus turns to global PMIs on Friday. Ahead of those, the FOMC minutes and Nvidia’s earnings are due later on today. It remains to be seen how much these two factors will influence the FX markets, especially the FOMC minutes given that we have heard hawkish Fed commentary since the Fed’s last meeting. Anyway, the GBP/USD remains finely balanced ahead of these events.
 

It is all about UK budget for pound

There’s now only a week to go until the UK’s Autumn Budget and a lot of the focus will be on the Chancellor Rachael Reeves and her ability to maintain fiscal discipline. Markets are jittery as has been evidenced in the bond markets where UK yields have risen noticeably and the GBP/USD exchange rate has weakened. But it is not clear whether the recent rise in gilt yields was driven by UK specific news, or a general rise in global yields, most notably in Japan. Perhaps a combination of both. UK yields jumped apparently after reports the UK government was scrapping plans to raise income tax. This has cast doubt over how a £30 billion fiscal hole will be plugged. Reeves will have a lot of convincing to do next Wednesday or we could see a drop in UK assets.
 

Dollar extends rebounds amid risk off tone

The risk-off environment at the start of this week is prompting a return of safe-haven demand for the dollar, with the DXY rising for the fourth consecutive day.  Also supporting the dollar is a modest hawkish repricing of US interest rates, driven by recent Fedspeak, which has set a cautious tone ahead of key data releases. Pricing for a December Fed cut has is now 11 basis points, bringing the implied probability of a cut to around 50%.

Attention for the US dollar traders will now turn to September’s payrolls report which will be released on Thursday. This is expected to come in just below the 60K mark, with the unemployment rate seen unchanged at 4.3%.
 

UK and US PMIs should only be a distraction

Global PMIs will be released on Friday, November 21, with both UK and US figures to provide some noise for the GBP/USD. UK manufacturing PMI is expected to remain just below the 50.0 level and services just above it at 52.00, similar levels to the previous months. In the US, too, the PMIs are expected to largely remain unchanged at 52.0 for manufacturing and 54.6 services. 

But as mentioned, with the UK budget taking place on November 26, now less than a week away, investors will be paying less and less attention to UK data. Reports that the Chancellor is scrapping plans for income tax hikes are keeping pressure on the GBP/USD forecast, as it leaves question marks over how the £30bn fiscal hole will be filled.
 

Technical levels to watch
 

(Click on image to enlarge)

The area between 1.3100 to 1.3140 is pivotal, where the cable had previously formed a double bottom earlier this year, before that support area gave way in early November. Since then, the GBP/USD has oscillated around this zone, unable to make a decisive move away from it. The bulls will want to hold their ground above this area if they want to re-assert control. So far, it doesn’t look like they are doing a great job at that, but if successful then 1.3200, followed by 1.3250 will be in focus next. A decisive break below 1.31000-1.3140 area would be a bearish outcome; in this scenario, 1.3050 and then 1.3000 could be the next stops.

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