The British pound (GBP) has demonstrated resilience despite a backdrop of disappointing economic indicators. Over the past week, the pound closed positively, appearing unaffected by a notable decline in retail sales and a slowdown in service sector activity, as highlighted in recent preliminary PMIs. However, the uncertainty around Chancellor Rachel Reeves's upcoming budget, set for November 26, is likely to weigh on the currency in the coming days.
Analysts have observed a shift in investor sentiment towards the GBP, with concerns mounting over potential tax increases and imminent interest rate cuts associated with fiscal pressures. The pound has recently descended to multi-month lows, particularly against the US dollar and the euro. As of now, GBP/USD stands at 1.3096, which is approximately 1.9% lower than its three-month average of 1.3353. This pairing has seen relatively stable trading within a 4.8% range from 1.3019 to 1.3646.
In parallel, GBP has been under scrutiny due to the UK's fiscal situation. Speculation is rife regarding the Office for Budget Responsibility potentially revising its productivity forecasts downwards, which could lead to a budget shortfall of £20 billion. This concern has contributed to a bearish outlook in the options markets. The GBP's decline has been particularly pronounced against the Euro, where it currently trades at around 1.1381, close to its seven-day highs but still 0.7% below its three-month average.
Contributing to the downward trend, market expectations of an interest rate reduction by the Bank of England have grown stronger, particularly as speculation surrounds the central bank's stance following the upcoming budget. The pound has fallen to its weakest levels against major currencies, with a notable decline seen against the Euro, which recently rose to its highest levels against sterling since May 2023.
Despite current pressures, GBPJPY at 205.2 shows some strength, trading 1.9% above its three-month average of 201.4 and reflecting a range of 197.9 to 206.0. In summary, as investors brace for the budget announcement, volatility in the GBP is expected, with significant implications for those engaged in international transactions involving the pound.
