UK budget in focus as British Pound pares losses but stays below 1.3300

• Still below 1.3300, GBP/USD remains on course for a four-day reversal despite recovering from two-week lows of 1.3275.
• Caution prevails among investors as they await UK Chancellor Healey's budget.
• With the Fed expected to keep US interest rates unchanged, investors will scrutinise its guidance for signals of a December hike.
  

Selling pressure on the British Pound (GBP) against the US Dollar (USD) has extended into a fourth consecutive day on Wednesday, as investors await two events later in the day: the UK budget and the US Federal Reserve’s (Fed) monetary policy decision. After touching a fresh two-week low of 1.3275, GBP/USD recovered to 1.3295 at the time of writing.

How Prime Minister Andy Burnham’s cabinet intends to fund its announced tax exemptions to ease British citizens’ cost of living will be the key focus in the UK this week. Those plans are due to be set out in the cabinet’s first budget.

Caution persists in markets against a backdrop of stretched UK public finances. Total public debt exceeded GBP 3 trillion in September as net borrowing rose significantly. Although previous chancellor Rachel Reeves left a buffer of GBP 23.6 billion, rising debt costs are likely to have absorbed approximately half of that amount. Chancellor Healey’s budget details are therefore likely to spark some Pound volatility, with bond markets on edge and memories of the 2022 Liz Truss fiasco still fresh.

Can the Dollar Stay Supported as FOMC Risk Replaces AI Concerns?

Whether Chairman Kevin Warsh endorses market expectations of another rate hike in December is the central question for the US policy announcement, given his aversion to forward guidance. The Fed itself is widely expected to keep interest rates unchanged.

Speculative demand for the Greenback is strengthening as market attention shifts. ING strategists explain that “a little stability on the AI side has allowed the FX market to re-focus on the clearer and more present danger of higher energy, higher inflation and the central bank response,” underpinning that demand.

Looking ahead to the Fed’s communication, ING strategists say they “suspect Chair Warsh will not want to tie himself in knots by citing a tightening in financial conditions, having learnt from the unruly market response to his press conference in July.” Their expectation instead is that a “focus on restoring monetary stability should remain the dominant message and keep the dollar supported.”