FX Daily: Trive Bearish on GBP/USD
With UK inflation continuing to decline in September, markets anticipate a potential rate cut from the BoE in November, especially following recent comments from BoE’s Bailey, who indicated the Bank could cut rates aggressively if inflation drops further. Meanwhile, the USD remains supported as market expectations for a November rate cut have diminished, driven by ongoing geopolitical risks and the upcoming US election.
GBP: November will cut?
The GBP has had a tough start to Q4 in October, impacted by both global and domestic factors. On the global side, the strong rebound of the high-yielding, safe-haven USD has been a major factor in the recent GBP/USD decline. Additionally, tighter global financial conditions, coupled with US political and geopolitical risks, have weakened risk sentiment, affecting the risk-sensitive GBP.
Domestically, a sharper-than-expected drop in UK CPI inflation in September, particularly in services inflation (where the BoE is more focused), which fell to 5.6% y/y from 5.9%, has added further pressure on the GBP against both the USD and EUR. This inflation decline has bolstered dovish views within the MPC, especially following recent comments from Governor Bailey, who suggested the BoE could ease aggressively if inflation falls significantly. As a result, UK rate markets have priced in a more aggressive, front-loaded easing cycle, diminishing the GBP’s rate appeal.
Looking ahead, focus will be on the UK’s preliminary PMIs for October and BoE speeches. FX investors will closely monitor whether the PMI data confirms reports of weakening UK business confidence ahead of the October budget, which could introduce new austerity measures. Markets will also look for signs of growing support within the MPC for more aggressive easing. The GBP remains vulnerable in the short term, though some downside risks appear to be priced in, making the currency less overvalued than before.
USD: The king is return
The USD continues its rally into October, largely driven by uncertainty surrounding the upcoming US election and the potential return of Donald Trump to the White House. Market participants are adjusting their USD exposure as a 'Trump hedge'. They are focusing on two possible outcomes: a Kamala Harris presidency with a divided US Congress, which may result in a dysfunctional government but leave fiscal policy and the economic outlook largely unchanged, or a Trump presidency with a ‘red wave’ in Congress, which could lead to additional fiscal spending, higher inflation, and a less dovish Federal Reserve stance.
In the FX markets, both scenarios tend to favor USD strength. A Harris victory might initially cause the USD to weaken as Trump hedges unwind, but a soft US economic landing could eventually increase demand for USD assets. A Trump victory, on the other hand, is expected to strengthen the USD due to the likelihood of persistent inflation, a less hawkish Fed, and increased macro and geopolitical risks. Notably, Asian currencies were hit hardest by the USD rally following Trump’s 2016 win.
Beyond the election, domestic factors and geopolitical risks also support the USD. US consumer spending remains strong, with retail sales (excluding auto and gas) rising by 0.7% m/m in September, up from 0.2% in August. This robust retail performance points to Q3 GDP growth, with consumption likely growing over 3% annualized. Additionally, uncertainties in the Middle East pose a geopolitical risk, which could enhance the USD’s safe-haven appeal ahead of the election. In summary, both internal and external factors continue to support a strong USD in the near term. Looking ahead, the US calendar is light this week, with October's preliminary PMI data being the key focus. In the absence of major data surprises, investors will closely follow election polls. Further evidence of Trump’s rise in the polls could give the USD an additional boost. Markets will also monitor speeches by Fed officials.
GBP/USD 4H Chart
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