Cable Awaits UK GDP After Budget

With the Autumn Budget risk now in the rearview mirror, cable traders are looking at the economic data for signs that will allow the BOE to ease and the economy to grow.

The Key Developments

• The UK economy is expected to return to growth in October at 0.1%, compared to -0.1% in September.
• Uncertainty from the Budget is in the past, with investors looking to economic performance and the BOE for guidance.
• Markets remain confident in a rate cut at next week's policy meeting, although the BOE's rate trajectory remains divided.

UK Economy to Remain Slow For Now

Chancellor Rachel Reeves was in Parliament on Wednesday, defending her Autumn Budget that had generated considerable market consternation ahead of its release a couple of weeks ago. The focus was on the leak controversy surrounding the Budget release, rather than on the content itself, suggesting that markets are taking the new measures in stride. The increased taxes are expected to be sufficient to cover the fiscal hole the government faces next year, assuming the country at least meets growth expectations. That could be aided by next week's BOE decision, with economists widely expecting a 25 bps rate cut.

One of the side effects of the Budget is a half-point reduction in inflation next spring, according to the BOE, which is helping to support expectations that monetary policy will continue to ease. The central bank has turned its attention to growing slack in the jobs market, with slower wage growth, which is believed to result in less inflationary pressure. With a sluggish economy and additional taxes, economists expect that the labour market will remain weak next year, justifying further rate cuts. However, this might not translate into a drop in cable if the Fed's easing pace is faster than the BOE's and the economy stages a recovery. Underperformance in Britain's GDP would likely weigh on the pound, as it would draw the attention of deficit hawks, in addition to the usual effect of lower interest rates. But a rebound in the British economy could slow the pace of rate cuts and support the pound.

Chances for a Rebound

The UK October GDP is expected at 0.1% compared to -0.1% in September. If that's the case, it would break the slowing trend for the economy this year. Britain grew at a 0.7% rate in Q1, 0.3% in Q2, and a paltry 0.1% in Q3. That trend might have continued in the early part of Q4 as investors held back amid the uncertainty around the Autumn Budget. The question is whether investment steps up now that the uncertainty in that area is over. But markets can turn their attention to the uncertainty around the BOE after the 5-4 vote to hold back in November. The divisions within the MPC seem to be still in place, with hawks worrying that the recent spending increases could push inflation higher. The upcoming GDP figures may help clarify the outlook for monetary policy in the UK and influence the reaction of the cable exchange rate.

Cable Forms Double Top For Now

The pound has left behind the 1.3300 handle recently, opening the door to the October high of 1.3471. But price action appears somewhat flat after cable extended above 1.3385 and formed a double top in the short term, bringing the lower Bollinger Band near 1.3286 into focus. So far, all pullbacks since roughly 1.3000 have been driving prices higher, but losing the short-term support would increase the chances of a deeper correction, with 1.3265 and 1.3215 coming into play.

Source: SpreadEx | GBPUSD