GBPUSD could be in for mid-week “sneaky surprise”

• GBPUSD’s forecasted volatility jumps 24% over past week

• UK government set to issue most debt since 2020

• US Treasury refunding announcement in focus

• Friday’s US NFP triggered GBPUSD moves of ↑ 0.5% & ↓ 0.6% over past year

• Bloomberg FX model: GBPUSD has 73% of trading within1.2836 – 1.3126 this week

Here’s something GBPUSD traders may not be aware of this week.

The UK and US governments are due to make twin announcements on Wednesday, October 30th that could translate into big moves for this FX pair.

Leading up to these announcements, the forecasted volatility for GBPUSD a.k.a “cable” has already risen by 24%, even though the period also covers the upcoming US presidential elections (but that’s a story for a not-too-distant article).

 

    1) UK Autumn Budget 2024

Chancellor of the Exchequer Rachel Reeves is set to deliver the new Labour government’s first annual budget on Wednesday at 12:30pm UK time.

Reeves is expected to announce a package of tax hikes and increased borrowing plans that will push UK debt sales to £293 billion – the highest since the response to Covid-19.

Investors will also keep an eye on any major updates on the country’s finances and the government’s plan for public spending.

This event will likely influence sentiment towards, not just the UK economy in the medium to longer term, but also GBPUSD in the immediate aftermath

The bigger picture…

Well, much attention will be on the debt sales worth the forecasted £293 billion.

This figure sets the market’s expectations for this pivotal announcement.

What does this mean?

Large debt sales may fuel concerns about inflation if they are seen as a sign of increased government spending.

High inflation expectations could even prevent the Bank of England from cutting rates as the expected pace.

Slower-than-expected BOE rate cuts could then lead to Sterling strength.

At the time of writing, traders have priced in a 25-basis point BoE cut in November with the probability of another 25 basis point cut by December at 60%.

How might this impact the GBPUSD?

• The GBPUSD could jump if total debt sales surpass the £293 billion estimate as investors push back bets around faster BoE rate cuts.

• Should total UK government debt sales announced below the $293 billion figure, this may weaken the GBPUSD as BoE rate cut expectations remain intact.

 

    2) US Treasury quarterly refunding

On the other side of the Atlantic, the dollar could be rocked by heavy hitting reports on Wednesday including the Q3 GDP and ADP employment data.

The US economy is expected to remain resilient, with a forecasted 3% growth in Q3 along with 110,000 jobs added in October, according to the Automatic Data Processing Inc. ADP).

But there’s another event you may not spot on most economic calendars that could serve a “sneaky surprise” for broader markets as well.

The US Treasury quarterly refunding, which is perhaps the focus of most bond traders, could have a major impact on the USD-side of GBPUSD on Wednesday.

The bigger picture...

This is where the US government announces how much new debt needs to be sold to markets to keep financing its budget for the quarter.

This event has sparked some action in the bond markets in the past, influencing the US dollar as result.

According to Bloomberg, bond dealers widely expect that the refunding auctions will total $125 billion for the third straight quarter.

How might this impact the GBPUSD?

As an oversimplification:

Falling Bond Prices --> Rising Yields --> Stronger Dollar (and vice versa)

With the above logic in mind …

• A higher-than-$125 billion figure suggests that the US Treasury plans to sell more bonds to markets.
  
  If this weakens Treasury prices, yields could push higher, boosting the USD. A stronger USD is seen dragging the GBPUSD lower.

• A lower-than- $125 billion figure may boost bond prices, pulling yields lower and weakening the USD. Dollar weakness could see the GBPUSD jump.

But wait, there’s more!

 

    3) US October nonfarm payrolls (NFP) report

Friday’s US jobs report, due at 12:30PM GMT on November 1st, will then come at the tail end of a busy and potentially volatile trading week for the GBPUSD.

This will be the final jobs report before the US election and something that could shape expectations around what action the Fed takes for the rest of 2024.

The US economy is expected to have created 110,000 jobs in October, a major drop from the 254,000 jobs seen in the previous month.

The also crucial unemployment rate is forecasted to remain unchanged at 4.1%.

Ultimately, a disappointing report may fuel speculation around Fed rate cuts, despite potential distortions in the NFP data from the effects of recent Hurricanes and industrial strikes.

Traders are currently pricing in a 96% probability of a 25-basis point Fed cut by November with the odds of another 25 basis point rate cut by December at 70%.

Over the past year, the US NFP report has triggered upside moves of as much as 0.5% or declines of 0.6% in a 6-hour window post-release for GBPUSD.

 

    4) Technical forces

This currency pair nicknamed “cable” has shed almost 3% month-to-date, pressured by a dovish Bank of England (BoE) and recent dollar rebound.

Although prices are bearish on the daily charts, the upcoming events could determine whether GBPUSD enters the new month above or below the psychological 1.30 level.

• A solid daily close below the 100-day SMA may open the doors toward the 200-day SMA at 1.2800.

• Should the 100-day SMA prove to be reliable support, this may send prices toward 1.3070 and the 50-day SMA at 1.3140.

Bloomberg’s FX model forecasts a 74% chance that GBPUSD will trade within the 1.2836 – 1.3126 range, using current levels as a base, over the next one-week period.