Will the Bank of England manage to save the economy? Goldman Sachs urges it to cut rates as early as November. Tax hikes and budget spending cuts will likely slow both GDP and inflation. What lies ahead? Let’s discuss it and make a trading plan for GBP/USD and EUR/GBP.
The article covers the following subjects:
Major Takeaways
- The pound is falling due to budget problems.
- The UK economy risks losing momentum.
- The BoE may cut rates as soon as November.
- Short positions on GBP/USD remain attractive, with downside targets near 1.31.
Weekly Fundamental Forecast for Pound Sterling
Storm clouds are gathering over the UK economy and the pound. EUR/GBP climbed above 0.88 for the first time in two years, while GBP/USD collapsed to its lowest level since April as November approached, when the government is set to present its budget plan. Prime Minister Keir Starmer refused to rule out raising income tax or VAT to fill the fiscal black hole. If that happens, Labor will fail to keep its main campaign promise.
Chancellor Rachel Reeves said the government must find £35 billion to close the budget gap. Barclays estimates the figure closer to £40 billion, while Rabobank warns the real gap could be much larger than markets anticipate. According to the Financial Times, the Office for Budget Responsibility will cut its productivity growth forecast by 0.3 p.p., which could cost the government about £20 billion in lost revenue.
UK Inflation Trends
Source: Bloomberg.
Tax hikes and spending cuts threaten to slow the British economy. It’s no surprise that Goldman Sachs is urging the Bank of England to act preemptively and cut rates at its November 6 meeting. Bloomberg experts doubt this will happen, while futures markets put the odds at roughly 1 in 3. The probability of renewed monetary easing in 2025 has risen to 67% following the September inflation slowdown. Derivatives now price in two rate cuts by June 2026.
Consumer prices came in below the BoE’s 4% forecast — a development that strengthens the hand of the dovish members of the Monetary Policy Committee. The MPC is already one of the most divided in history, at times requiring repeat votes to reach a final decision.
Thus, concerns over tax hikes, budget spending cuts, and their negative impact on GDP, combined with slowing inflation, are leading investors to price in a faster easing of the BoE’s monetary policy than previously expected. This drives UK bond yields lower, widens their spread with U.S. Treasuries, and pushes GBP/USD down.
UK Bond Yield Dynamics
Source: Bloomberg.
The pound is also losing ground to the dollar. In the U.S., markets got ahead of themselves by betting on a Fed rate cut in December. Jerome Powell’s comments that such expectations are premature cooled bullish sentiment on GBP/USD. Derivatives have since reduced the odds of the Fed easing this year, while for the BoE, those odds are only growing.
Weekly Trading Plans for GBP/USD and EUR/GBP
Repricing of central bank rate expectations is forcing the pound off the battlefield. EUR/GBP has already reached the first upside target at 0.881. The next one at 0.895 is still in play, so long positions remain valid. Short positions on GBP/USD also stay relevant, with targets around 1.30.
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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