Below 1.3300: British Pound pares losses as UK budget takes centre stage

• 1.3275 marks a two-week low for GBP/USD. The pair has recovered but remains below 1.3300, heading for a fourth day of declines.
• Ahead of UK Chancellor Healey's budget announcement, investors remain cautious.
• With the Fed expected to keep US interest rates unchanged, investors will watch for signals of a December hike.
  

GBP/USD touched a fresh two-week low of 1.3275. It subsequently recovered to 1.3295 at the time of writing. The British Pound (GBP) remains on course for its fourth consecutive daily decline against the US Dollar (USD) on Wednesday. Investors are awaiting both the UK budget and the US Federal Reserve’s (Fed) monetary policy decision later in the day.

How Prime Minister Andy Burnham’s cabinet plans to fund its announced tax exemptions will be the central question in its first budget, this week’s key UK event. The exemptions are intended to ease the cost of living for British citizens.

A sharp rise in net borrowing pushed total UK public debt above GBP 3 trillion in September, leaving public finances under strain and markets cautious. Higher debt-servicing costs are likely to have absorbed approximately half of the GBP 23.6 billion buffer left by the previous chancellor, Rachel Reeves. Against a backdrop of nervous bond markets and lingering memories of the 2022 Liz Truss fiasco, Chancellor Healey’s budget details are likely to generate some volatility in the Pound.

Dollar finds support as FOMC risk eclipses AI concerns

While an unchanged US interest rate decision is widely anticipated, attention centres on whether Fed Chairman Kevin Warsh will endorse market expectations for another hike in December. His aversion to forward guidance leaves that question open.

Speculative demand for the Greenback is strengthening as currency markets turn back to energy prices, inflation and monetary policy. ING strategists explain that “a little stability on the AI side has allowed the FX market to re-focus on the clearer and more present danger of higher energy, higher inflation and the central bank response,” supporting that demand.

As for the Fed’s message, ING strategists say they “suspect Chair Warsh will not want to tie himself in knots by citing a tightening in financial conditions, having learnt from the unruly market response to his press conference in July.” Their expectation instead is that a “focus on restoring monetary stability should remain the dominant message and keep the dollar supported.”