GBP/USD forecast as UK Gilt yields surge ahead of US NFP data

The GBP/USD exchange rate plunged to its lowest point in weeks, while UK bond yields soared as traders reacted to Rachel Reeves’s first budget as Chancellor. The pair was trading at the important support of 1.2900, much lower than the year-to-date high of 1.3430.

UK bond yields soar

The GBP to USD exchange rate continued its strong sell-off after Reeves delivered a mixed budget reading.

In it, she decided to increase taxes in her bid to raise £40 billion, which will be used to fund key priorities like energy transition and the National Health Service (NHS).

Some of these tax hikes will be from the national health insurance deductions and ending the non-dom. Also, she hopes to generate more money from the private equity industries.

At the same time, she hopes to continue borrowing, a move that will stretch public resources at a time when the debt has soared. 

Therefore, there are two main risks that investors are worried about. First, increased borrowing could put the UK at a more dangerous place financially. Second, higher taxes could affect the country’s economy in the long term.

These factors explain why the yield on the ten-year government bonds jumped by 0.09% to 4.45%, the highest level this year. 

The UK economy has been relatively strong this year. Data released in October showed that the economy expanded a bit in the previous month, a better performance than was widely expected. 

The country has also won the battle against inflation as consumer prices have continued falling in the past few months. The most recent report showed that the country’s inflation retreated below the BoE’s target of 2.0% in the previous month.

The BoE has already slashed interest rates once, and analysts expect it to cut more in the next meeting, which will happen on Nov. 7. Such a cut will bring rates from the current 5.25% to 5.0%. In a statement, ING analysts said:

“The extra spending announced in this budget does make us a little less confident in our forecast for a December rate cut, which would follow the 25bp move widely expected next week. But the BoE’s response to fiscal loosening, both earlier in 2024 and this time last year, was fairly muted. In other words, we still think the Bank of England will deliver more aggressive rate cuts than markets now expect.”

US nonfarm payrolls data

The GBP/USD exchange rate also continued falling after the US published the latest personal consumption expenditure (PCE) report, the Fed’s favourite inflation number. The Fed loves this figure because, unlike the Consumer Price Index (CPI), it looks at price changes across urban and rural areas.

Data by the statistics agency showed that the headline PCE dropped from 2.3% in August to 2.1% in September. It rose from 0.1% to 0.2% on a month-on-month basis.

The core PCE, which excludes the volatile food and energy prices, remained unchanged at 2.7% during the month. These numbers confirmed that the country’s inflation was moving in the right direction, and will soon move below the Fed’s target of 2.0%.

The next important catalyst for the GBP/USD pair will be the upcoming US nonfarm payrolls (NFP) data, which will provide more information on the state of the economy.

Economists expect the data to show that the economy created 115k jobs in October, a big drop from the 254k it created a month earlier. 

The unemployment rate is expected to have remained at 4.1%, while the average hourly earnings remained at 4.0%.

These numbers will come as the Fed prepares for next week’s meeting, in which analysts expect that it will cut rates by 0.25%. If this happens, it will take the country’s rates to between 4.75% and 5.0%. 

The US dollar index has jumped even as the Fed cuts interest rates. This recovery accelerated after the US published encouraging NFP and retail sales data last month.

GBP/USD technical analysis

GBP/USD chart by TradingView

The daily chart shows that the GBP to USD exchange rate peaked at 1.3430, its highest point on September 26.

It has dropped below the 38.2% Fibonacci Retracement point, meaning that bears are in control. The pair has also crashed below the 50-day and 100-day Exponential Moving Averages (EMA), pointing to more downside.

Also, the MACD indicator has moved below the zero line and is at its lowest level since April 26. The Relative Strength Index (RSI) has moved below the neutral level of 50 and is pointing downwards. 

The GBP/USD pair has moved below the ascending trendline that connects the lowest swings since April 22nd this year.

Therefore, the path of the least resistance for the pair is bearish, with the next point to watch being the 50% retracement point at 1.2735. 

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