The British Pound (GBP) against the US Dollar (USD), often referred to as “Cable,” has displayed notable volatility lately, primarily due to significant economic developments in the UK. Recently, GBP/USD broke below a crucial long-term ascending trendline, symbolizing a potential shift towards further downside risks. This analysis explores the underlying causes contributing to the pressure faced by the Pound and assesses future trading prospects for this currency pair.
A major catalyst for GBP’s current struggles is the recent UK budget announcement, which introduced the largest tax increases in over two decades, alongside plans for heightened government spending. Chancellor of the Exchequer’s declaration of a £40 billion tax hike was a shockwave that reverberated through the market. Although this plan is aimed at enhancing public services and infrastructure, the immediate consequence has been a detraction from traders’ confidence in the Pound. Rate cut expectations from the Bank of England (BoE) should ideally lend support to the GBP, but the recent fiscal changes have led traders to recalibrate their outlook, reducing bets on upcoming rate cuts.
Furthermore, the Office for Budget Responsibility’s forecast of persistent inflation rates, projected at 2.5% for 2024 and 2.6% for 2025, adds a layer of concern. The projections signal that higher borrowing could exacerbate inflationary pressures, feeding into a cycle that raises the odds of the BoE maintaining or even tightening monetary policy in the future. The implications for the Pound are bleak, as increased fiscal strain raises doubts about the UK’s ability to restore financial order, leading to warnings from rating agencies like Moody’s regarding muted growth prospects.
Compounding these challenges is the latest S&P Global Flash UK Manufacturing PMI data, which demonstrated a decline to 49.9 in October 2024, down from 51.5 in September. This marked the first contraction in manufacturing activity since April, indicating a cooling economy. The reduction in new orders, coupled with a decline in international demand—especially from key trading partners such as Europe, China, and the US—exacerbates the bearish sentiment surrounding the GBP.
Encouragingly, while production managed a minor uptick as companies worked through backlogs, the overall environment remains concerning. The slower pace of job creation within the sector further underscores the challenges businesses face. Material costs have eased, theoretically bolstering profit margins, but this has had little impact on the overall sentiment of GBP traders. The current lack of manufacturing momentum raises red flags about the UK’s economic recovery and could diminish expectations for future interest rate adjustments.
In light of these developments, GBP/USD is at a crossroads—having decisively broken below the long-term trendline established in April. This critical juncture allows for multiple potential scenarios. A retest of the trendline might occur before another potential drop, with the 1.300 level serving as a key marker for short positions. For traders, an ideal scenario for opening short positions may come with a potential pullback towards this trendline before lower targets are assessed.
On the downside, immediate support lies near the 200-day moving average around the 1.2800 mark, with stronger support levels at 1.2750 and 1.2681 following closely. Conversely, any upside movement needs to break convincingly above the 1.30150 level to negate the bearish sentiment currently engulfing the market.
The GBP/USD pairing is facing headwinds stemming from fiscal accountability issues and disappointing economic indicators from the UK. The volatility hints at a volatile near-term outlook, driven by the interplay of external economic pressures and internal British fiscal policies. For traders, understanding these dynamics while monitoring critical support and resistance levels remains essential for informed decision-making. As markets await further economic data, the overall sentiment trends towards caution while navigating the incoming US labor numbers, which could further sway the already reactive GBP/USD performance.