British Pound remains below 1.3300 despite paring losses as UK budget takes centre stage

• After touching a two-week low of 1.3275, GBP/USD recovers but stays below 1.3300, still heading for a fourth day of losses.
• Caution prevails among investors as they await UK Chancellor Healey's budget.
• With the Fed expected to keep US interest rates unchanged, investors will look for signals of a December increase.
  

A fresh two-week low of 1.3275 in GBP/USD has given way to a recovery to 1.3295 at the time of writing. Nevertheless, 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, due later in the day.

The first budget from Prime Minister Andy Burnham’s cabinet takes centre stage in the UK this week. Attention will fall chiefly on how the government intends to fund the tax exemptions it has announced to ease the cost of living for British citizens.

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

Dollar finds support as FOMC risks displace AI concerns

An unchanged interest rate decision is widely anticipated from the Fed in the US. Less clear is whether Chairman Kevin Warsh, given his aversion to forward guidance, will endorse market expectations for a further rate increase in December.

Speculative demand for the Greenback is being bolstered by a shift in market attention, according to strategists at ING. They observe 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,”

Turning to the Fed, ING says its strategists “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.” Rather, they anticipate that a “focus on restoring monetary stability should remain the dominant message and keep the dollar supported.”