UK Autumn Budget: Will GBP/USD, GBP/JPY and EUR/GBP Suffer a Financial Chill
During the European trading session on Wednesday (October 30), GBP/USD was trading around 1.3000, down 0.11%.
GBP has gained steadily against most G7 currencies, with the exception of the US dollar and euro. The pound held steady against the euro and dollar as markets awaited greater clarity on the interest rate cycles from the three central banks.
Over the past few weeks, there appears to have been a growing divergence in investor expectations between the Fed and the Bank of England and the European Central Bank. After the market began to digest expectations that the two central banks may cut interest rates more significantly, the Fed’s interest rate cut expectations also decreased.
The change in the dollar comes as data continues to be released, which paints a positive picture for the U.S. economy. On the other hand, sterling’s latest services sector inflation fell sharply, well below the Bank of England’s forecast of 5.5% by the end of 2024. This increased expectations for a rate cut from the Bank of England and put slight pressure on the pound. All attention now turns to the UK budget, which is due tomorrow.
UK autumn budget
Attention now turns to the much-anticipated UK Autumn Budget, the first of the recently elected Labor government.
There are many questions about the UK budget. However, there are some important differences this time around, with markets appearing to remain calm ahead of the event. There doesn’t appear to be any political risk premium this time around, with ING research pointing to short-term fair value for EUR/GBP at 0.834. Keep in mind that during the previous UK political/gilt related turmoil, EUR/GBP had a risk premium of around 3-5%.
Secondly, data from the U.S. Commodity Futures Trading Commission (CFTC) on October 22 showed that speculators have a long tendency to hold the pound. Among G10 currencies, traders hold the largest net long positions in sterling, accounting for 32% of open interest, with these positions resisting the shift towards the dollar in other major currencies.
Key issues to watch in tomorrow’s Budget include tax changes, changes to fiscal rules and growth targets and targets. Labour’s manifesto specifically highlights the importance of “balancing investment priorities with the urgent need to rebuild public finances”. Rachel Reeves had particular resonance last week when she said the Labor government would redefine public debt in the budget. This has sparked some interest and it will be interesting to see how the Chancellor plans to do this.
According to Reeves, the change is designed to allow for increased borrowing to fund infrastructure and investment projects, potentially freeing up to £50 billion. Reeves emphasized that the borrowing will be used for long-term investment, rather than daily expenditure, and is intended to promote economic growth and create jobs.
Taxing the wealthy is another sticking point for the future budget. However, looking back at history, this will not be the first time the incoming administration has raised taxes. In every post-election fiscal episode since 1992, the chancellor has increased taxes.
All in all, this will be an interesting Budget.
technical analysis
GBP/USD
(GBP/USD daily chart source: Yihuitong)
From a technical perspective, GBP/USD is at very important levels, with psychological levels coming into play at 1.3000. If the daily candlestick closes below this level, the pair may move lower further.
The daily candlestick near the 1.3000 level has proven elusive for much of the week. This leaves GBP vulnerable to further downside, with a potential run towards the 1.2800 area becoming increasingly attractive. I had expressed hope for further gains above 1.3000, but technicals are starting to point to the possibility of a breakout to the downside.
Two scenarios may play out in the coming days. The first is a breakout, with the daily K-line chart closing above the 1.3000 mark, which could lead to further upside.
The second scenario is a downward push and break above the uptrend line, which would initiate a run towards support at 1.28060 (200-day moving average).
Support levels: 1.2950 (100-day moving average), 1.2900, 1.2806 (200-day moving average)
Resistance levels: 1.3040, 1.3100, 1.3143
GBP/JPY
(GBP/JPY daily chart source: Yihuitong)
GBP/JPY has been slowly moving higher since bottoming on August 5. On September 16, there was another downward push into the 180-190 range before moving upward again.
GBP/JPY broke above the 200-day moving average and then started heading towards the 200.00 resistance level. Today’s high of 199.690 puts GBP/JPY at a key cross ahead of tomorrow’s budget.
Looking at the daily chart, if tomorrow’s daily K-line chart closes above 200.00, GBP/JPY may head towards July’s high of 207.57. There may be some resistance near 203.00, which could lead to a pullback as the RSI is currently just approaching overbought territory.
Weakness in GBP tomorrow could push GBP/JPY towards the 200-day moving average, which sits at 195.00. There is also an area of support at 193.84 before the 190.00 handle comes into focus.
Support levels: 195.16 (200-day moving average), 193.84, 190.00
Resistance levels: 200.00, 203.00, 207.57
EUR/GBP
(EUR/GBP daily chart source: Yihuitong)
EUR/GBP holds near year-to-date lows around the 0.8300 mark. The pair is struggling to gain acceptance above the confluence at 0.8345, an overlapping resistance area.
Immediate resistance is at 0.8342, and the 50-day moving average at 0.8385 may also provide some resistance. The area between 0.8400-0.8487 carries the 100- and 200-day moving averages as well as recent swing highs.
Conversely, if GBP strengthens tomorrow due to the UK budget, the year-to-date lows around 0.8295 could be breached before the 2022 lows around 0.8200 come into focus.
Support levels: 0.8300, 0.8250, 0.8200
Resistance levels: 0.8345, 0.8400, 0.8447
At 17:46 Beijing time, GBP/USD was at 1.2993, down 0.16%. EUR/GBP was at 0.8336/38, an increase of 0.31%. GBP/JPY was at 198.9720/930, down 0.26%.