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GBPUSD volatility is set to increase before this week's UK budget.

There is likely to be an uptick in volatility in the GBPUSD currency pair this next week or so, as we are in the middle of the US earnings season with major earnings reports from the largest US tech companies coming out this week, which could move the market. US Congress is getting closer to agreeing on the Build Back Better spending plans, and the UK has its Autumn Budget scheduled for this week.

GBPUSD analysis

Last Friday Fed Chair Powell came pretty close to saying the Fed had made a policy mistake as: “The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation… Supply constraints and elevated inflation are likely to last longer than previously expected and well into next year, and the same is true for pressure on wages. If we were to see a risk of inflation moving persistently higher, we would certainly use our tools.”

Many on the FOMC have been calling for a tighter monetary policy and Powell even said that in September he felt that conditions had been met to change policy direction. The buying of emergency levels of asset purchases has been flagged for a reduction from the November meeting next week, with rate hike expectations moving closer to the end of 2022. We’re in the blackout period before the FOMC so we won’t be hearing from voting Fed members for a while, so technical traders will be looking for recent swing highs and lows to trade the ranges.

In the period between the June FOMC meeting and early October, the US dollar has been pricing in this highly likely Hawkish policy change. For the first time since summer, the dollar now appears to be in the process of rolling over in a decisive way. A hawkish Fed has possibly been fully priced into the market and we might also be starting to see long positions from June start to unwind.

Pound traders will be paying attention to the autumn Budget, which takes place on 27th October 2021. British media outlets are reporting that the UK Chancellor of the Exchequer Rishi Sunak intends to raise the minimum wage in the country to £9.50 from £8.91, and will also unfreeze public sector pay, reversing measures introduced last year because of the COVID-19 pandemic. Any additional income is obviously welcome to those suffering from higher household costs seen over the last year, but the fact is the more money in the system will be possibly chasing fewer goods as we’re still seeing bottlenecks in supply chains.

GBPUSD sentiment is seeing a reduction in bearish sentiment coming back towards being more evenly spread and the GBPUSD price action is currently magnetized to the breakout level and the daily 200 ema.

A break above the 1.3920 daily swing high would confirm a bullish reversal from the lows of September. For the bears, the rising channel since September could break to the downside so keeping an eye on the daily 20 & 50 ema’s will act as an early warning indicator of more downside. I favor moves to the upside in Cable as we’re above the daily 200 ema with an aggressive breakout from 1.3800 being my next level of interest. That would then set up for a retest, continuation type trade, where the swing low on a smaller time frame would give traders a better risk to reward stop placement, rather than having a 100 pip stop ahead of the risk events.

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