GBP/USD: A Starry Hour for the Vulnerable Pound

[Ben Graham]

On Wednesday, the pound surged by more than 150 pips against the dollar amid a general weakening of the greenback. Looking at the weekly GBP/USD chart, we can see that the pair is actively rising for the second week in a row, currently approaching the resistance level of 1.3370, which corresponds to the middle line of the Bollinger Bands indicator on the weekly timeframe. In comparison, just a few weeks ago—in November—the pair was trading at the bottom of the 30 range under background pressure.

However, the fundamental picture for GBP/USD has changed. The growth driver this time is the greenback, which again fell from grace amid rising "dovish" expectations for the Federal Reserve's future actions. Still, the British currency also made a contribution after UK Treasury Secretary Rachel Reeves presented the new autumn budget to Parliament.

The uncertainty surrounding the UK budget for next year had pressured the pound for nearly two months.

Earlier this fall, Reeves hinted that she would raise taxes in the upcoming autumn budget to cover a £22 billion deficit, admitting that the ruling Labour Party would break its election promise not to burden citizens with higher taxes. The situation seemed stymied, with rumors of Reeves's potential resignation adding extra pressure on the pound. Market sentiment leaned toward the belief that her successor would likely abandon the current fiscal framework, undermining confidence in the pound against the backdrop of increasing government debt and deteriorating financial conditions.

However, these concerns did not materialize. Reeves did not resign and presented a budget announcing a £26 billion annual tax increase to finance the deficit and create a reserve. Furthermore, the Chancellor implied that her department aims to maintain discipline in borrowing.

As a result, GBP/USD traders effectively acknowledged that concerns regarding the autumn budget were exaggerated. Consequently, market participants shifted their focus to the dynamics of the U.S. currency, which has weakened for the second consecutive week.

Unlike the EUR/USD pair, where the European Central Bank supports the euro, the Bank of England is not on the side of the British currency. Representatives of the BoE have continued to use dovish rhetoric, and most analysts are confident the BoE will cut the interest rate by 25 basis points at its December meeting, which takes place in exactly two weeks. Macroeconomic reports published over the past few weeks reinforce the likelihood of a dovish scenario unfolding.

According to the latest data, overall inflation in the UK has slowed to 3.4%, the lowest level since May of this year. Core CPI also decreased to 3.4%. The Retail Price Index (RPI) slowed to 4.3%, marking a five-month low. The purchasing price index, which relies on commodity price dynamics, also fell into the red zone.

The UK labor market has also disappointed. Specifically, the unemployment rate rose to 5.0%, its highest level since January 2021. The number of jobless claims increased by 29,000 in October, marking the worst result since July 2024. The average wage level (including bonuses) increased by 4.8%, while the forecast was set at 4.9%. Excluding bonuses, the wage figure slowed to 4.6%, the lowest since June 2022 (the indicator has been declining since March of this year).

Finally, the UK's third-quarter GDP growth data was disappointing. GDP volume decreased by 0.1% month-on-month—the first time since May of this year that the indicator fell below zero. On a quarterly basis, weak growth was recorded at only 0.1%.

The PMI index for the construction sector, released on Thursday, further complements the fundamental picture, dropping to 39.4, the lowest level since May 2020.

All of this suggests that the BoE will likely cut the interest rate by 25 basis points in two weeks. This fundamental factor will come to the forefront when the market reacts to the anticipated 25-point rate cut by the Fed. This will occur next week during the Fed's meeting. If Jerome Powell does not announce further steps to lower rates at the December meeting, buyers of GBP/USD will find themselves in a difficult position: the dollar may undergo a correction, and the pound may not be able to push the pair up on its own.

However, currently, market participants are trading on the general weakening of the greenback, so long positions in the pair remain relevant, at least in the short term. There are three price targets on the horizon: 1.3370 (the middle line of the Bollinger Bands on the weekly timeframe), 1.3390 (the upper line of the Bollinger Bands on the H4 timeframe), and 1.3430 (the upper boundary of the Kumo cloud on the D1 timeframe).

The material has been provided by InstaForex Company - www.instaforex.com