Pound eases from its high ahead of UK Budget and Fed decision

• GBP/USD slips below 1.3350 after reaching a five-week high on 22 October.
• Dollar buying resumes ahead of the Fed, while Sterling holds steady against the Euro.
• Wednesday brings Chancellor Healey’s Budget, followed by US PCE on Thursday.

Below 1.3350, GBP/USD reached its lowest level since the 20 October jobs figures on Monday as traders bought back Dollars ahead of Wednesday’s Federal Open Market Committee (FOMC) decision. Sterling was unchanged against the Euro, leaving Dollar buying responsible for the decline. After three sessions above 1.3350, the pair finished just beneath it.

With the Fed expected to leave rates unchanged following September’s increase, traders reduced some of their bets against the Dollar by buying it back. The declines in EUR/USD and GBP/USD were almost identical, keeping EUR/GBP steady and indicating that the entire GBP/USD move came from the Dollar side.

According to The Times, Chancellor Healey intends to increase the minimum wage for over-21s by about 3.9% to around £13.20. The proposed increase is two-tenths faster than the 3.7% growth in pay excluding bonuses, a figure central to the argument for a Bank of England (BoE) rate rise on 5 November. The following two five-minute bars both showed gains in GBP/USD.

Budget and rate decisions lead the calendar

Wednesday’s first Budget from Chancellor Healey will be accompanied by the Debt Management Office’s gilt sales plan. The announcements fall eight days ahead of the BoE’s 5 November decision, for which traders have almost fully priced in a quarter-point increase in the UK’s Bank Rate from 3.75%.

At 18:00 GMT on Wednesday, the Fed will announce its decision. Futures imply a probability near 90% that rates will remain at 3.75%-4.00%, alongside odds near 80% of a December increase. Thursday at 12:30 GMT brings both the initial estimate of US third-quarter Gross Domestic Product (GDP) and September’s Personal Consumption Expenditures Price Index (PCE), each of which will inform expectations for December.

GBP/USD retreats below its 50-day EMA

A test of the 200-day Exponential Moving Average (EMA) coincided with the 22 October high just above 1.3400, with the average sitting at roughly the same level. Following Monday’s decline, GBP/USD was back below its 50-day EMA. The retreat from that high has retraced about a third of the advance from the 14 October low near 1.3150, while daily momentum is easing from overbought levels.

Daily chart for GBP/USD