GBP/USD stabilised after dropping 0.90% following UK finance minister Rachel Reeves’ tax hike warnings to meet fiscal targets. The pair traded at 1.3028, unchanged, with traders cautious. The Bank of England (BoE) is likely to hold rates, with some anticipating a rate cut by year-end due to soft inflation data.
In the US, strong economic indicators have emerged. The ISM Services PMI rose from 50 to 52.4 in October, and Prices Paid increased to 70. Meanwhile, the ADP Employment Change report showed non-farm jobs rose by 42K, surpassing forecasted 25K. This reduced the probability of a December Federal Reserve rate cut to 64% from 68%.
Technical Outlook on GBP/USD
Technically, GBP/USD sees potential further downside. It fell below the 200-day Simple Moving Average at 1.3254. If it dips under 1.3000, it might reach the April 8 low of 1.2708. Conversely, breaking 1.3100 could allow a test of the week’s high at 1.3139. Elsewhere, the British Pound was strongest against the New Zealand Dollar this week, maintaining its position despite market fluctuations.
We are seeing significant pressure on the Pound following the UK finance minister’s warning about potential tax hikes. This raises fears of fiscal tightening, which is weighing on the currency as it struggles to hold the 1.3030 level. For us, this signals a clear bearish shift in sentiment for the coming weeks.
The latest CPI reading for October, which came in at just 2.1%, reinforces the view that the Bank of England has room to cut rates in December. This soft inflation, combined with recent government figures showing a widening public deficit, puts the BoE in a difficult position. We see this increasing the appeal of derivatives that profit from a fall in UK interest rate expectations.
Implications of US Economic Data
On the other side of the pair, the US economy looks robust, with last Friday’s Non-Farm Payrolls report showing a strong addition of 195,000 jobs. This solid labor market data has pushed the market’s expectation for a December Fed rate cut down to just 55%, according to the CME FedWatch tool. This divergence between a likely hold from the Fed and a potential cut from the BoE is the primary driver for our strategy.
We remember how sensitive the Pound was to fiscal policy back in late 2022, and these new warnings are bringing back bad memories for the market. While the current situation is different, the underlying fear of a policy misstep that could harm growth remains. This history suggests any further talk of tax increases could trigger another sharp leg down.
Given this outlook, we believe positioning for further downside in GBP/USD is the logical approach. Buying put options with a strike price below the 1.3000 psychological level offers a defined-risk way to play for a move towards the April lows near 1.2708. Volatility is likely to pick up around the upcoming BoE meeting, making options an attractive tool.
