Investors saw Labour’s new budget as a commitment to fiscal consolidation. This supported UK assets and kept GBP/USD from falling. Now it is the Bank of England’s turn. Let’s examine the current market environment and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- GBP/USD took Labour’s budget in stride.
- Expectations for the Bank of England’s rate path remain unchanged.
- The BoE will move faster than the Fed, bolstering the pound.
- Consider buying GBP/USD if it breaks above 1.3335.
Weekly Fundamental Forecast for Pound Sterling
Chancellor John Healey’s main goal was to keep Labour’s new budget out of the spotlight. The government wanted to avoid a repeat of the turmoil in France and let investors focus on unrest in Paris or the escalating conflict in the Middle East. The plan worked: with no radical measures to attract attention, the budget largely went unnoticed. That was good news for GBP/USD.
Whether the new budget will slow inflation is open to debate. The Office for Budget Responsibility expects it to lower CPI inflation by 0.1 percentage points in 2027 and raise it by the same amount in 2028. Consumer price growth is forecast to reach 3.8% early next year and then ease to an average of 3.4% over the following 12 months. This outlook has kept the derivatives market confident that the BoE will raise rates in November and tighten policy three times in the current cycle.
UK Inflation Trends and Forecasts
Source: Bloomberg.
British industrialists have complained at length that the new budget lacks bold measures to help companies invest, hire, and drive economic growth. From their point of view, the plan is a half-measure that pleases no one. Even so, John Healey achieved his main aim of keeping the markets calm. Investors saw that Britain remains committed to fiscal consolidation, and bank shares rose after the levies on lenders turned out to be lighter than expected.
Bond Yield Trends
Source: Bloomberg.
The pound passed the budget test without much trouble. The GBP/USD pair slipped initially, then quickly returned to its previous level. Since the market is pricing in three rate hikes from the Bank of England, the pound’s prospects now look strong.
Recent UK data turned out mostly positive. Unemployment dropped from 4.9% to 4.7%. Headline inflation picked up from 3.1% to 3.5%, while core inflation rose from 2.6% to 2.8%. PMI readings came in above expectations and hit their highest levels in five to six months. Retail sales were the one disappointment. Overall, the BoE has solid grounds to raise rates at its November 5 meeting, and derivatives traders see a 98% chance of a 25-basis-point increase to 4%.
Expectations of tighter BoE policy should support the GBP/USD pair, especially as the Fed plans to hold off until December. A US rate hike in 2027 is also far from certain, given Kevin Warsh’s concerns about the future of artificial intelligence.
Weekly Trading Plan for GBP/USD
The direction of the GBP/USD pair will depend on incoming data. As the Bank of England’s November meeting draws closer, expectations of a rate hike could push the pair higher. If the price breaks above 1.3335, consider opening long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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