Pound Sterling resumes downtrend as UK Budget draws near

The Pound Sterling (GBP) broke its previous week’s consolidation to the downside against the US Dollar (USD), as GBP/USD revisited levels below the 1.3100 threshold.

Pound Sterling sellers returned with a bang

The broad-based USD resurgence and increased concerns over the United Kingdom’s (UK) fiscal health emerged as the two main underlying themes during the week, driving the GBP/USD price action.

The Greenback garnered strength from receding interest rate cut bets for the US Federal Reserve (Fed) and worries about AI technology stock overvaluations. However, the former was the main catalyst.

Markets preferred to hold the US currency in the lead-up to the quarterly earnings report from chipmaker giant Nvidia and the first US employment data release, following nearly two months without public data.

As a result, the upside in the pair remained restricted, with a fresh leg lower seen on the release of the UK Consumer Price Index (CPI) for October.

Data published by the Office for National Statistics (ONS) showed on Wednesday that the headline annual CPI increased by 3.6% in October, in line with market expectations and compared to a rise of 3.8% in September.

The UK inflation cooled down for the first time in five months, reviving bets for a rate cut by the Bank of England (BoE) next month. Following the UK CPI report, traders increased BoE easing bets with December cut probabilities rising to 85% versus 80% pre-data release.

The market now sees 63 basis points (bps) of monetary easing by the end of 2026 compared to 59 bps before the inflation report. GBP/USD hit fresh 11-day lows at 1.3038 in the aftermath.

Thereafter, Pound Sterling buyers briefly came up for air in the first half of Thursday’s trading, courtesy of the relief rally on global stocks. Nvidia reported a 65% jump in net income, beating analysts’ estimates and temporarily calming nerves surrounding overvaluation concerns.

However, strong US Nonfarm Payrolls data for September paused the risk rally, as markets believed that higher-than-expected job gains could dissuade the Fed from further monetary policy easing.

The NFP rose by 119,000 in September, following a 4,000 decrease (revised from +22,000) recorded in August. The reading outpaced the market forecast of 50,000. Meanwhile, the Unemployment Rate rose to 4.4% from 4.3% in this same period. 

Markets continued to price in about a 40% chance that the Fed will lower rates next month as officials remained cautious about their policy stance due to inflation risks.

The renewed risk-aversion wave, combined with easing Fed rate cut bets, helped the USD hold its ground near ten-month highs against its major currency rivals, halting the pair’s recovery.

Buyers once again tried their luck on Friday but faced headwinds from a bigger-than-expected drop in British retail volume data. Retail Sales fell by 1.1% in October, against expectations of no growth.

Further, the UK S&P Global Preliminary data showed that UK private sector growth eased in November, adding to the downside pressure on the Pound Sterling. The S&P Global Composite Purchasing Managers’ Index (PMI) dropped to 50.5 in November from 52.2 in October. The data came in way below the estimates of 51.8.

The USD held resilient against its peers on Friday and limited GBP/USD’s upside as the S&P Global reported in its preliminary estimate that the Composite Purchasing Managers’ Index (PMI) rose to 54.8 from 54.6 in October. This print highlighted an ongoing expansion in the private sector’s economic activity at a robust pace.

UK Autumn Budget and US economic data set to rock GBP markets

The main event risk of the upcoming week is the British 2025 Autumn Forecast, followed by the Budget speech from Chancellor of the Exchequer Rachel Reeves.

The Budget is highly anticipated after the Financial Times (FT) reported earlier this month that UK Prime Minister Keir Starmer and Reeves scrapped plans to raise income tax rates in a massive U-turn.

According to the Guardian, speculation remains that “the chancellor could extend a freeze on income tax and NI thresholds beyond the planned 2028-29 deadline.”

Next in relevance will be the resumption of the mid- and top-tier economic data releases from the United States (US), the September Producer Price Index (PPI), Retail Sales and Durable Goods Orders data.

Meanwhile, the October Core Personal Consumption Expenditures (PCE) – Price Index figures are also slated for release, alongside the third-quarter Gross Domestic Product (GDP). But there is no official confirmation of these metrics as yet.

Additionally, speeches from the Fed and BoE officials will be closely scrutinized to gauge the path forward on interest rates from these major central banks.

GBP/USD Technical Outlook

On the daily chart, the 21-day Simple Moving Average (SMA) extends its decline beneath the 50- and 100-day SMAs, and the pair holds under all of them, keeping the short-term outlook bearish. The 50- and 100-day SMAs continue to slide, while the 200-day SMA edges higher, highlighting short-term weakness against a steadier long-term trend. The Relative Strength Index (RSI) stands at 36.55, below the midline and consistent with persistent selling pressure.

Adding credence to the bearish potential, the 50-day SMA is looking to cross the 200-day SMA from above, and if that happens on a daily candlestick closing basis it would confirm a Death Cross.

Immediate resistance aligns with the 21-day SMA at 1.3154. Recovery attempts could face the rising 200-day SMA at 1.3298, with additional caps at the 50-day SMA at 1.3320 and the 100-day SMA at 1.3392. RSI needs to firm toward 50 to suggest fading bearish momentum and allow a more durable bounce. While price trades beneath the descending short- and medium-term averages, the path of least resistance would remain to the downside.

(The technical analysis of this story was written with the help of an AI tool)