FOREX: GBP Budget Bounce Could Prove Short-lived as Relief Rally Fades

Bund block trade, suggest buyer:

• RXZ5 2k at 129.71.

Downdraft in GBP in early trade puts GBPUSD through yesterday’s lows of 1.3311 on decent volumes: GBP futures have now printed volumes of 20% above average for this time of day after a sharp uptick in activity at 0839GMT – suggesting a flow-driven move rather than a headline or news trigger spell of weakness.

• The fiscal picture remains the key driver more broadly, particularly given the increasing signs that the Chancellor will have to raise income tax at this month’s budget to fill a widening fiscal hole (as detailed above).
• This has pressured BoE rate pricing across year-end meetings as well as through 2026, however the market is yet to fully factor in 2 x 25bps rate cuts until April.
• The GBPUSD bear trigger remains 1.3249, the October 14 low – which leaves the Fed decision tomorrow evening as the next key news driver.

The German IFO Export Expectations index fell by 0.6 points to 2.8 in October. While the index is off its cycle lows, IFO continues to remain on the pessimistic side regarding German export prospects, commenting "there is no real recovery in sight."

• IFO commentary in September already suggested improvement last month may have been a one-off at least to some extent.
• Across sectors: "The metal industry is feeling the pressure from abroad particularly acutely, with companies expecting exports to decline. The chemical and paper industries anticipate a decline in exports. Although expectations in mechanical engineering and the food industry are better than in the previous month, actual export growth has yet to materialize. In contrast, the automotive industry continues to be very optimistic about international business, with export expectations rising once again. Manufacturers of electrical equipment also expect to increase their exports."
• As a % of nominal GDP on a 12-month rolling basis, the trade surplus extended its current downtrend, at 4.7% as of August, 1.2pp below levels seen around a year ago. That compares with a 2015 high of 8.0% and 2022 low of 2.1%.