GBP/USD forecast: UK CPI and US NFP in focus; UK budget bigger test

While the Japanese yen has stolen the headlines for all the wrong reasons thus far this week, the GBP/USD should start to become more volatile in the days ahead as investor attention turns to macroeconomics. From the UK, we have CPI lined up ahead of next week’s key budget, while from the US, September’s delayed payrolls report will be released on Thursday before the focus turns to global PMIs on Friday. The FOMC minutes and Nvidia’s earnings are also due on Wednesday, which may not have too much influence on FX markets. The GBP/USD forecast remains finely balanced ahead of these events.

 

 

Forget CPI it is all about UK budget for GBP/USD forecast

 

There’s now only a week to go until the UK’s Autumn Budget and a lot of the focus will be on the Chancellor Rachael Reeves and her ability to maintain fiscal discipline. Markets are jittery as has been evidenced in the bond markets where UK yields have risen noticeably. But it is not clear whether the recent rise in gilt yields was driven by UK specific news, or a general rise in global yields, most notably in Japan. Perhaps a combination of both. UK yields jumped apparently after reports the UK government was scrapping plans to raise income tax. This has cast doubt over how a £30 billion fiscal hole will be plugged. Reeves will have a lot of convincing to do next Wednesday or we could see a drop in UK assets.

 

Meanwhile, we will have the small matter of UK CPI to look forward to on Wednesday, at 07:00 GMT. This is expected to have eased to 3.5% from 3.8% previously. CPI is important, and it could move the pound, if the data deviates from expectations significantly.

 

Dollar rebounds amid risk off tone

 

The risk-off environment at the start of this week is prompting a return of safe-haven demand for the dollar, with the dollar index rising for the third consecutive day.  Also supporting the dollar is a modest hawkish repricing of US interest rates, driven by recent Fedspeak, which has set a cautious tone ahead of key data releases. Pricing for a December Fed cut has is now 11 basis points, bringing the implied probability of a cut to around 50%.

 

Attention for the US dollar traders will now turn to September’s payrolls report which will be released on Thursday. This is expected to come in just below the 60K mark, with the unemployment rate seen unchanged at 4.3%.

 

UK and US PMIs should only be a distraction

 

Global PMIs will be released on Friday, November 21, with both UK and US figures to provide some noise for the GBP/USD. UK manufacturing PMI is expected to remain just below the 50.0 level and services just above it at 52.00, similar levels to the previous months. In the US, too, the PMIs are expected to largely remain unchanged at 52.0 for manufacturing and 54.6 services.  

 

But as mentioned, with the UK budget taking place on November 26, now less than a week away, investors will be paying less and less attention to UK data. Reports that the Chancellor is scrapping plans for income tax hikes are keeping pressure on the GBP/USD forecast, as it leaves question marks over how the £30bn fiscal hole will be filled.

 

Technical levels to watch

 

 

The 1.3140 area is pivotal on the GBP/USD chart, where the cable had previously formed a double bottom earlier this year, before that level gave way in early November. Since then, the GBP/USD has oscillated around this level, unable to make a decisive move away from it. The bulls will want to hold their ground above this level if they want to re-assert control. If so, 1.3200 and then 1.3250 will be in focus next. Bearish if we break below it decisively this week; in this scenario, 1.3000 could be the next stop.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R