British Pound eases below 1.3350 as UK budget and Fed rate decision approach

• Near 1.3335, GBP/USD trades modestly lower in early European dealings on Tuesday.
• Wednesday brings the first budget from the new Chancellor of the Exchequer, John Healey.
• An unchanged interest rate is expected when the Fed announces its decision on Wednesday, with traders awaiting the outcome.

With the US Federal Reserve (Fed) expected to leave interest rates unchanged on Wednesday, traders are holding back ahead of that decision and the UK Autumn Budget, also due on Wednesday. GBP/USD slips towards 1.3335 in Tuesday’s early European session as market participants stay on the sidelines rather than commit to sizeable positions.

Rising global borrowing costs and elevated energy prices stemming from the Iran war form the backdrop to Wednesday’s first budget from the UK’s new Finance Minister, John Healey. To put the public finances on a less fragile footing, Healey can curb ballooning health and disability benefits and reform taxes to tackle complexity and perverse incentives.

Additional revenue is also needed by the new Chancellor of the Exchequer. An increase of one percentage point in all income tax rates could bring in approximately £11 billion a year by the 2029–30 financial year, covering the shortfall in defence spending.

Guillermo Felices, PGIM’s global investment strategist, said: "It's hard to be immune in an environment where global bond yields are going higher, but among major developed markets, the UK is looking like one of the cleanest dirty shirts out there,"

Having raised rates for the first time since 2023 at its September policy meeting, the Fed is likely to hold them steady when its October meeting concludes on Wednesday. September’s increase of 25 basis points (bps) took the range to 3.75% to 4%.

Just a 10.5% probability of a Fed rate increase on Wednesday is now priced into markets. Nevertheless, high energy prices continue to encourage bets on a rise before the end of the year.

Pound gains support from BoE policy shift and calmer UK budget proceedings

A turning point is approaching in the Bank of England’s long-running effort to “ride out the energy price shock – partly to avoid stifling the real economy too severely”, according to Commerzbank analysts. In their assessment, “the combination of rising inflation, a slight improvement in the labour market, and fairly strong growth figures this year is likely to lead to a change of heart next week,” while “a first interest rate hike… basically fully priced in, and the market [expecting] a further three rises by the middle of next year.” The expected change in policy “has supported the pound in recent weeks.”

Energy is playing an increasingly prominent role in inflation, Commerzbank observes, noting that “the four direct energy components in the inflation index now account[ing] for almost one percentage point of the year-on-year total.” When these are combined with “highly energy-dependent components, the 2% target has in fact already been practically reached.” The difficulty for the BoE remains that “the less energy-intensive components (primarily services) continue to contribute significantly… inflation has recently drifted further away from the target”.

The presentation of Prime Minister Andy Burnham’s new budget is viewed as a further source of stability in this environment. Commerzbank adds a qualification: “while this is unlikely to result in major progress (Burnham recently announced that significant changes would only occur following a potential re-election), market participants are likely to be relieved that the presentation of the new budget is proceeding relatively calmly.” Support for the Pound therefore comes from the prospect of tighter BoE policy, improving labour market trends, firmer inflation and greater resilience in UK government bonds.

GBP rate cut expectations remain constrained as Greene warns wage disinflation has stalled

At 7.4/10, Greene’s speech score on FXS Speechtracker is in line with the historical average. Although this indicates a consistent tone, it is distinctly hawkish relative to recent market expectations for the Pound. Resistance to near-term rate cuts is reinforced by her emphasis on wage disinflation having stalled above levels compatible with 2% inflation, together with her view that policy should act proactively against second-round inflation risks.

Greene’s assessment that second-round risks are greater than previously believed is supported by forward-looking pay growth nearer 3.5%, unexpectedly resilient economic activity and indications that labour market slack may have peaked. With wage disinflation stalled and activity holding up, yields are likely to find support, limiting GBP’s downside, particularly against currencies facing weaker wage and demand trends.

Technical Analysis: GBP/USD retains a slight bearish tilt beneath the 100-day SMA

Trading below the 100-day simple moving average (SMA) leaves GBP/USD with a modestly bearish short-term outlook on the daily chart. However, its position above the 20-day Bollinger middle band points to some underlying buying interest within the wider corrective pattern. The upper Bollinger band defines the top of the current volatility range. A neutral Relative Strength Index (14) reading of 50.6 suggests balanced directional momentum, leaving scope for further losses or consolidation as long as the 100-day SMA continues to cap the pair.

The first upside hurdle is the 100-day SMA at around 1.3390. Should buyers seek a recovery, the next obstacle would be the 20-day Bollinger upper band near 1.3420. Initial downside support lies at 1.3285, the 20-day Bollinger middle band, followed by a more substantial structural floor around the lower Bollinger band at roughly 1.3150. A deeper retreat towards that area would be expected to draw buying interest.

(The technical analysis of this story was written with the help of an AI tool. Know more.)