GBP/USD Forecast: Could test sub-1.3200 levels/200-day SMA; focus shifts to Fed’s Powell

The GBP/USD pair attracts heavy selling during the early part of the European session on Tuesday and drops to mid-1.3200s, or its lowest level since early August, in reaction to the disappointing UK labor market report. Data published by the Office for National Statistics (ONS) showed that the UK ILO Unemployment Rate edged up to 4.8% in the three months to August, compared to 4.7% recorded in the previous month and consensus estimates. Further details revealed that the number of people claiming jobless benefits rose 25.8K in September, against a revised fall of 2.0K in August.

Meanwhile, Average Earnings, including Bonus, increased by 5.0% during the quarter through August, beating expectations and the previous reading of 4.7%. That said, regular pay growth, excluding Bonus, eased to 4.7% during the reported period, down slightly from 4.8% previously and marking the weakest pace since March–May 2022. The data fuels speculations that the Bank of England (BoE) could continue cutting interest rates gradually and weighs heavily on the British Pound (GBP). This, along with renewed US Dollar (USD) buying, is seen exerting pressure on the GBP/USD pair.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, turned positive for the second straight day and remains close to its highest level since early August, touched last Thursday. The recent political developments in Japan and France have been weighing on the Japanese Yen (JPY) and the Euro (EUR), respectively, and benefiting the buck. That said, any meaningful USD appreciation still seems elusive in the wake of concerns that a prolonged US government shutdown would affect the economic performance and dovish Federal Reserve (Fed) expectations.

With no resolution in sight, the stalemate over how to reopen the US government will extend into a third week as Democrats and Republicans continue to trade blame for the shutdown that began on October 1. Furthermore, Republican Speaker Mike Johnson said that the shutdown could become the longest in history, warning that he won’t negotiate with Democrats until they pause their health care demands and reopen government. The Senate returns on Tuesday and is expected to vote again on the funding plan, which has fallen short of the necessary 60-vote threshold seven times.

Meanwhile, the CME Group's FedWatch Tool indicated that traders have fully priced in the probability that the Fed will lower borrowing costs by a 25-basis-point (bps) in October and see a 90% chance for another rate reduction in December. The dovish outlook could act as a headwind for the USD ahead of Fed Chair Jerome Powell's appearance later during the North American session. In the meantime, concerns over the UK’s fiscal outlook ahead of the Autumn budget in November might continue to undermine the GBP and cap the GBP/USD pair's attempted recovery.

GBP/USD daily chart

Technical outlook

Some follow-through selling below mid-1.3200s could drag the GBP/USD pair further towards the 1.3200 round figure. This is closely followed by a technically significant 200-day Simple Moving Average (SMA), currently pegged near the 1.3180, below which spot prices could test the August monthly swing low, around the 1.3140 region, before eventually dropping to the 1.3100 mark.

On the flip side, any attempted recovery beyond the 1.3300 mark could be seen as a selling opportunity and remain capped near the 1.3365 supply zone. A sustained move beyond the latter, however, could trigger a short-covering rally and lift the GBP/USD pair above the 1.3400 round figure, towards the next relevant hurdle near the 1.3465-1.3470 region en route to the 1.3500 psychological mark.