The Bank of England is often as responsive to changing economic conditions as the Federal Reserve, but the UK economy remains weaker than that of the US. At the same time, the UK currency faces additional uncertainty ahead of the Labour government’s budget announcement. Let’s examine the current market environment and develop a trading plan for the GBP/USD.
The article covers the following subjects:
Major Takeaways
- The strength of the US economy is limiting the GBP/USD pullback.
- The Bank of England is in no hurry to raise rates.
- Expectations surrounding the UK budget are weighing on the pound.
- Short positions can be opened with targets of 1.3150 and 1.3025.
Weekly Fundamental Forecast for Pound Sterling
After surging to weekly highs, the GBP/USD has resumed its downtrend as the US dollar strengthens against major global currencies. US GDP growth of 2.2% and elevated inflation point to continued economic resilience, supporting the dollar’s strength amid revived American exceptionalism. Meanwhile, sterling faces growing uncertainty ahead of the Labour government’s upcoming UK budget announcement.
Morgan Stanley has described the fiscal risks facing sterling as asymmetric and forecasts the GBP/USD at 1.3000 by the end of 2026 and 1.2700 by mid-2027. Against this backdrop, investors may demand a higher risk premium for holding the pound as the October 28 budget announcement approaches, potentially adding further pressure on the currency.
GBP/USD Risk Reversals
Source: Bloomberg.
There is some logic behind this move. The pound sterling’s monthly volatility has risen to its highest level since July, while the risk of a further reversal in the GBP/USD has diminished alongside the pair’s decline. Traders are currently paying more for protection against a sharp fall in the pound than for hedging against further appreciation.
Rising fiscal and political risks could also constrain the Bank of England’s room for maneuver. In September, the Monetary Policy Committee voted 6–3 to keep the Bank Rate at 3.75%, while markets began pricing in the possibility of tighter monetary policy in November. However, one member of the majority, Dave Ramsden, unexpectedly echoed views associated with Kevin Warsh. According to Ramsden, tighter financial conditions resulting from higher bond yields could limit the risk of second-round effects feeding into core inflation. In other words, the BoE may not need to rush to raise rates, as the bond market is already doing part of the tightening work.
Derivatives markets are pricing in approximately 33 basis points of additional rate increases by year-end, implying one 25-basis-point hike with some probability of a second move. Expectations are less aggressive than those for the federal funds rate, which provides one explanation for the recent pressure on the GBP/USD. The outlook becomes even more complicated as investors focus increasingly on the UK budget, one of the pound’s key sources of uncertainty.
Andy Burnham’s plans to reform the social security system could require additional fiscal resources, potentially including tax increases. Such measures could weigh on economic growth and reduce the scope for further monetary tightening by the Bank of England. If markets ultimately price in less than the 100 basis points of rate increases currently expected by derivatives markets through 2027, this could add further pressure to the GBP/USD. As the budget announcement approaches, uncertainty surrounding the UK’s fiscal position and the future path of monetary policy could spark increased volatility in the pair.
Weekly Trading Plan for GBP/USD
The principle of “sell the rumor, buy the news” has long been applied to the Forex market and remains relevant. A pullback in the GBP/USD could provide an opportunity to add to existing short positions, with the previously identified targets at 1.3150 and 1.3025.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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