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Pound sterling's recovery against the dollar risks stalling, and we're watching the UK Budget and the Federal Reserve decision this week for fresh signals.
The Pound to Dollar exchange rate has run into its 100-day moving average and spent the past week unable to break clear of it, a sign the rebound from the October lows is losing steam.
A stall at this level is understandable given what lies ahead, with a Fed decision and a UK Budget set to make for an eventful week.
From a technical perspective, the 100-day moving average, shown in blue, has capped GBP/USD throughout the past week, and that resistance could thwart further gains:
GBP/USD daily chart. Image © Pound Sterling Live, chart created with TradingView.
GBP/USD trades at 1.3373 at the start of the week, just beneath the 100-day at 1.3390.
The pair pushed above the average intraday on four straight sessions last week, peaking at 1.3419 on Thursday, but it failed to build on any of those moves.
What does the 100-day denote? It tracks the average closing price over roughly five months of trading and is a guide to the medium-term trend. The average has been falling since early September, so repeated failures to close above it tell us sellers still have the upper hand over that horizon.
Beneath the market, graphical horizontal support at 1.3302 and 1.3274, the purple lines, acted as a ceiling in early October and should now cushion any dip.
We look for GBP/USD to stall beneath the 100-day this week, with a drift back towards 1.3302 the more likely path than a break higher. A daily close above Thursday's 1.3419 high would change our near-term Pound to Dollar forecast and open the way to the next horizontal at 1.3506.
Last week we forecast a further recovery to the 100-day, and the pair delivered on Tuesday, when the UK jobs beat lifted it to the average for the first time since mid-September.
Signs the Dollar's Dip Is Fading
The dollar's softness through mid-October looks to be fading, and several of the big banks see it as temporary.
"USD will recover some of last week's losses in our view but is unlikely to lift as high as 103pts," says Commonwealth Bank of Australia in its London Open note of 26 October, pointing to a run of strong U.S. data this week.
Barclays says the setback in AI stocks has not changed the bigger picture: "AI capex remains a structural dollar tailwind and OATs a lingering EUR drag," it writes in its FX weekly of 25 October.
The Fed Decision Will be Key for GBP/USD this Week
The Federal Reserve announces its decision at 18:00 on Wednesday, and consensus looks for the target range to stay at 3.75% to 4.00%.
Futures give a hike this week only about a 10% chance, against a December hike that is virtually fully priced, according to Brown Brothers Harriman, and OCBC puts the tightening priced at 22 basis points by year-end and a further 45 basis points in 2027.
With a hold expected and no new projections at this meeting, the dollar's reaction will turn on Chair Kevin Warsh's guidance and on how the vote splits. A hawkish outcome would back the dollar and weigh on GBP/USD, and a dovish one would do the reverse.
The bar for a dollar rally is a message that firms up the December hike and the path beyond it, such as Warsh saying inflation remains too high and further tightening is needed. Brown Brothers Harriman already expects a 9-3 vote with three officials dissenting in favour of a hike, so it would take more than three hawkish dissents to count as a surprise, and an outright hike would be the biggest shock of all.
The bar for a dollar decline is lower: "Some Fed-related positives are already in the USD's price especially if, as we expect, the Fed is on hold next week and Fed Chair Kevin Warsh fails to signal that another rate hike is imminent," says Crédit Agricole CIB in its FX weekly of 23 October, adding that "any renewed comments linking the policy outlook to financial conditions would weigh on the USD."
Crowded long dollar positioning adds to that risk. "The setup is asymmetric: a hawkish tone from the Fed could extend USD strength, but absent a meaningful hawkish surprise, crowded positioning leaves scope for a tactical dollar pullback or consolidation," says Lloyd Chan at MUFG in a note of 26 October.
OCBC sees little to unwind the hawkish pricing, arguing there is "a lack of trigger for market to further pare back rate hike expectations at this juncture," and Crédit Agricole notes that a lack of forward guidance leaves the dollar sensitive to the data that follows.
The key U.S. figures land at 12:30 on Thursday. Consensus has third-quarter GDP growth at 3.0% annualised, up from 2.2%, and core PCE inflation at 0.3% month-on-month and 3.1% year-on-year. Readings above consensus would lift the dollar, and misses would hand the pound some relief.
The rest of the U.S. calendar is second-tier, with durable goods orders and consumer confidence on Tuesday and the employment cost index on Friday, while quarterly results from Microsoft and Alphabet on Wednesday and Amazon on Thursday will test the AI trade.
Healey's Budget Is the Pound's Big Risk
On the sterling side, Chancellor John Healey's first Budget at 12:30 on Wednesday is the main event, and the bond market is where the verdict will show.
Healey has said he will stick to the current fiscal rules and aims to deliver "a buffer also for uncertainty," according to Commonwealth Bank of Australia, which warns: "Material loosening in the fiscal rules would sharply push up long term UK bond yields and weigh on GBP/USD like in 2022."
"Fiscal slippage and heavier gilt issuance can drive gilt yields up and GBP down," adds Brown Brothers Harriman.
A Budget that keeps borrowing in check would remove a risk, though it is unlikely to add much upside for the pound.
With the 100-day capping the pair, the dollar's dip looking temporary and two major risk events landing on the same day, we think GBP/USD's recovery has run its course for now, consistent with our Pound to Dollar forecast of a stall beneath 1.3420 this week.
