GBP/USD, DAX Forecast Two trades to watch

GBP/USD struggles as UK government borrowing exceeds forecasts, putting pressure on Healey

GBP/USD is struggling above 1.3350, around a six-week low, amid ongoing U.S. dollar strength and following data showing that UK public sector net borrowing was higher than expected in the first five months of the fiscal year.

UK public sector net borrowing was £18.3 billion in August, higher than the £15.4 billion recorded in the same month last year and ahead of expectations of around £15.5 billion. This was the second-highest August on record, behind 2020.

The UK deficit has climbed to £77.3 billion in the first five months of the fiscal year, £8.1 billion more than the Office for Budget Responsibility forecast.

These figures highlight the challenges facing Chancellor John Healey as he prepares his first Budget on October 28. The government needs not only to set out Prime Minister Andy Burnham's economic plans but also reassure a jittery bond market that borrowing remains under control.

The 10-year gilt yield is around 5.24%, mirroring moves in Europe as oil prices rise and snapping a four-day decline.

The rise in borrowing in August came despite improvements in tax receipts and reflected higher spending on public services and benefits, as well as increased debt interest costs.

Healey's room for manoeuvre is becoming increasingly limited, as higher borrowing costs, partly triggered by the Middle East conflict, have already reduced the government's fiscal headroom. KPMG estimates that headroom could fall to around £12 billion from £23.6 billion in March.

Speculation is therefore rising that the government will need to raise taxes or cut spending to rebuild its fiscal headroom.

Elsewhere, the U.S. dollar is pushing higher, extending gains from last week to a seven-week high after the Federal Reserve hiked interest rates and signalled at least one more rate hike this year.

Comments from Federal Reserve officials at the start of the week also reinforced expectations for further rate hikes, with Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem suggesting that tighter policy may be necessary to achieve the Fed's inflation target.

The BoE left rates unchanged last week. The BoE-Fed divergence is keeping GBP/USD under pressure.

GBP/USD forecast – technical analysis

GBP/USD broke down from the ascending channel, falling below the 50 and 200 EMAs. Combined with the RSI below 50, this keeps sellers hopeful of further downside.

Sellers will look to take out support at 1.3340 to turn attention to 1.3275, the late-July low. Below here, attention turns to the 1.3200 support zone.

Any recovery would first need to take out the 200 EMA at 1.3425. A rise above here turns attention to the 1.3500 resistance zone, which combines horizontal resistance, the lower band of the rising channel and the 50 EMA. A rise above 1.3500, the September high, would put the pair on a firmer footing.

DAX eases back after yesterday's gains as oil prices and political headwinds rise

The DAX, together with its European peers, is easing back after solid gains in the previous session.

The DAX rallied over 1% yesterday, boosted by tech and bank strength as oil prices retreated. However, today, a rise in oil prices is pushing bond yields higher, hurting demand for riskier assets such as equities.

Weakness in autos and financials is putting pressure on the index, whilst lingering political uncertainty in Germany adds to a cautious tone.

German political uncertainty remains a background headwind. Chancellor Friedrich Merz's CDU suffered significant losses in recent regional elections, raising questions over his political position and potentially making it harder for Germany to drive EU policy, including negotiations over the €2 trillion EU budget.

In elections in Mecklenburg-Western Pomerania on Sunday, the CDU fell below the 5% threshold for entering the state parliament, marking its worst result in the post-war period.

On the data front, the German economic calendar is quiet today, with attention turning to PMI figures tomorrow.

DAX forecast – technical analysis

The DAX ran into resistance around 26,500, forming a double top before reversing lower and breaking below its rising trend line to find support around the 25,500 zone. The RSI is below 50.

Sellers will need to take out the 25,500 support zone to create a lower low and turn attention to 25,000, the round number, and the 200 EMA at 24,900. Below here, sellers could gain traction.

Any recovery would need to rise above the 50 EMA at 25,700 and the horizontal and rising trend-line resistance at 25,800. Above here, attention turns to 26,500 and fresh record highs.