Insights 
VT 
GBP/USD trades lower around 1.3250 as UK food prices fall, sparking Bank of England rate cut expectations. The decline in Pound Sterling follows softer inflation data from the British Retail Consortium.
A 68% probability is now assigned to a quarter-point BoE rate cut in December. This sentiment is bolstered by the Office for Budget Responsibility’s plans to lower the UK productivity growth forecast by 0.3 percentage points, adding around £20 billion to the fiscal gap.
Chancellor Rachel Reeves Budget
Chancellor Rachel Reeves’s upcoming budget could address a potential £35 billion shortfall. GBP/USD dropped over 0.50% on Tuesday due to concerns about the UK’s fiscal outlook.
The pair currently trades at 1.3280 after earlier reaching 1.3247, its lowest since August. Meanwhile, the US Dollar is subdued, with the US Dollar Index down 0.10% at 98.70.
Amid President Trump’s ongoing Asia visit, a US-Japan alliance agreement was signed. This focused on securing critical minerals and rare earths, aligning economic interests between the two nations.
We are seeing significant pressure on the Pound Sterling, with the market now pricing in a high probability of a Bank of England rate cut before the year ends. The latest Consumer Price Index (CPI) figures released last week, showing inflation falling to 1.8%, have only added fuel to this expectation. This environment suggests that maintaining or initiating bearish positions on GBP crosses could be a prudent strategy in the coming weeks.
Chancellor’s Risk Event
The Chancellor’s upcoming November budget, which must address a potential £35 billion shortfall, is a major risk event on the horizon. Implied volatility on GBP/USD options has already ticked up to a three-month high, reflecting this market anxiety. Consequently, we believe purchasing put options could be an effective way to capitalize on potential further declines while managing the risk of sharp reversals.
We are also observing amplified weakness in pairs like GBP/JPY, which is approaching the 201.00 level. This move is not just about the Pound’s weakness but also a reflection of a broader risk-averse sentiment strengthening the Japanese Yen. The rally in Gold to the $4,000 mark yesterday further confirms this flight to safety across global markets.
While the case for a weaker Pound is strong, we must also factor in the Federal Reserve’s policy meeting later today. Current market pricing, according to the CME FedWatch tool, indicates a greater than 90% probability of a rate cut, which is keeping the US Dollar subdued. This dynamic could provide some temporary support for GBP/USD, making outright short positions potentially volatile around the announcement.
We have seen similar scenarios play out in the past, particularly during periods of fiscal uncertainty like the aftermath of the 2022 budget. In that instance, which we remember well, concerns over government finances led to a sharp and rapid depreciation of the Pound. The current warnings from the Office for Budget Responsibility should serve as a reminder of how quickly sentiment can turn.
