BoE Poised for Rate Cut as UK Inflation Drops, Fiscal Pressure Mounts Amid Global Economic Shifts

The Bank of England (BoE) is expected to cut interest rates by 25 basis points in its upcoming meeting, as British inflation hit a three-year low of 1.7% in September. The Labour government’s recent budget, which increased borrowing and spending, has led to higher UK borrowing costs, complicating the BoE’s decision-making. While investors now expect fewer cuts next year, economists predict a cautious stance, with only one more rate cut anticipated in December.

Amid economic slowdown, optimism among British firms is at its lowest in nearly a year, partly due to global uncertainties and the new government’s anticipated tax increases to address a fiscal shortfall of £22 billion. Public borrowing rose to £79.6 billion, pressuring the government to manage spending while boosting investment and infrastructure. Additionally, the minimum wage will rise by 6.7% from April 2025, benefiting low-income earners but challenging employers.

As UK Finance Minister Rachel Reeves prepares the government’s first budget, she faces pressures to balance growth initiatives with fiscal constraints. Investors are watching for potential adjustments to fiscal rules to support long-term investment while managing deficits conservatively to avoid market instability.

This week promises significant developments in global markets as the U.S. election and Federal Reserve policy decisions draw close. The dollar dipped in early Asian trading Monday, reflecting investor caution. The tight race between Democrat Kamala Harris and Republican Donald Trump, coupled with expectations of an additional interest rate cut, suggests that U.S. fiscal policies may soon shift, potentially impacting bond yields and the dollar.

Analysts suggest Trump’s policies would likely increase inflation and bond yields, strengthening the dollar. A recent poll showing Harris with a slight lead in Iowa boosted uncertainty around the election outcome. This uncertainty bolsters expectations that the Fed will announce a 25-basis point rate cut, with another likely in December.

Geopolitical risks are also elevating the dollar’s appeal as a hedge. BCA Research advises a long position on the dollar, citing escalating tensions in the Middle East and potential confrontations between Israel and Iran, which could disrupt global oil supplies. Rising tensions in Asia, with North Korea's support of Russia and potential conflicts, and in Europe, with the potential for U.S.-imposed tariffs under Trump, further underscore the dollar’s defensive value.

U.S. manufacturing activity fell to a 15-month low in October, largely due to labor strikes and increased input prices, reflecting strain in the sector despite resilient goods spending. Additionally, a new survey reported a drop in global white-collar job vacancies in September, attributed to economic and political uncertainties, especially in the U.S. and UK. The UK’s impending budget announcement is also prompting firms to pause hiring, awaiting potential tax increases and spending cuts from the new government. As a result, the GBP/USD pair is likely to remain within its current range, with a slight tendency to drift lower during this period.

Data for Technical Analysis (30Min) CFD GBP/USD

Resistance : 1.2979, 1.2983, 1.2989

Support : 1.2967, 1.2963, 1.2957

30Min Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.2957 - 1.2967 is touched, but the support at 1.2967 cannot be broken, the TP may be set around 1.2979 and the SL around 1.2952, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2979 - 1.2989, TP may be set around 1.2998 and SL around 1.2962, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2979 - 1.2989 is touched, but the resistance 1.2979 cannot be broken, the TP may be set around 1.2963 and the SL around 1.2994, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2957 - 1.2967, TP may be set around 1.2945 and SL around 1.2984, or up to the risk appetite.       

Pivot Points Nov 4, 2024 08:30AM GMT