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Why GBPUSD has dropped to a 7-month low ahead of the Autumn Budget
Summary
- Sharp Decline: This morning GBPUSD traded at 1.3006, a 7-month low
- Catalysts: On Tuesday, UK Chancellor Reeves discussed her rationale for the Autumn Budget reinforcing tax hike fears against a backdrop of general risk aversion
- Future Drivers: US ADP Private Sector Payrolls and ISM Services PMI Survey Releases, Bank of England Interest Rate Decision
Why has GBPUSD dropped?
Concerns about the precarious state of UK government finances has been weighing on sentiment towards GBPUSD as the UK Chancellor gets ready to outline her Autumn Budget on November 26th. With rumours circulating in the media of large tax hikes and possible deep spending cuts being prepared to fill a widening government deficit, Chancellor Rachel Reeves yesterday addressed the media to lay out the stark reality of the situation facing the country.
This was all set against a wider backdrop of general risk aversion to start November which as a rule leads to a stronger US dollar against it’s G7 peers, especially since the Federal Reserve were more hawkish than expected last week at their October interest rate meeting.
GBPUSD has fallen from a high of 1.3471 on October 17th to a 7-month low of 1.3006 this morning (at time of writing 0600 GMT), as can be seen on the chart below.
GBPUSD daily chart:
Is GBPUSD expected to rise or fall?
GBPUSD is currently under pressure but there are several key events today and tomorrow that could determine whether the downside move continues or leads to a squeeze back to higher levels. The first event later today is focused on the US dollar (USD) side of the GBPUSD currency pair, with a key update on the current health of the US labour market due at 1315 GMT (ADP Private Sector Payrolls). A stronger than expected ADP report could boost the dollar and see GBPUSD fall further, while a weaker report could lead to a relief rally for GBPUSD.
Tomorrow at 1200 GMT the Bank of England release their interest rate decision for November. The market expectation is for the UK central bank to remain unchanged at this meeting; however they are facing substantial political pressure to cut interest rates again to support the economy, so there could be room for a surprise, which could impact the direction of GBPUSD.
GBPUSD daily chart:
Technical Update: Downside momentum for GBPUSD has increased in the last week, which is reflected on the chart above by the Bollinger mid-average turning lower and the upper (green) and lower (red) Bollinger bands widening, highlighting the potential for increasing volatility in the direction of the trend. This has led to GBPUSD tagging the lower (red) Bollinger band to register a low this morning at 1.3006. This low coincides with the 61.8% Fibonacci retracement level of the April 7th low to the October 28th high at 1.3003. A break and close below this level could increase potential for a deeper sell off towards 1.2708, which is the April 7th low.
To the upside, the first resistance point for any rally could be 1.3162, the high from Monday (November 3rd). A break above this level could expose potential for a move to 1.3252, which is the declining Bollinger mid-average and could prove to be a tougher level to crack.
Support: 1.3003 (61.8% Fibonacci retracement), 1.2708 (April 7th low), 1.2332 (February 11th low)
Resistance: 1.3162 (November 3rd high), 1.3252 (Bollinger mid-average), 1.3370 (October 28th high)
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