GBP/USD, DAX Forecast: Two trades to watch

GBP/USD tests 1.30 ahead of BoE’s Bailey & next week’s Budget

• UK PSNB rose to £16.6 billion, the third highest ever for September
• BoE Andrew Bailey is due to speak
• USD hovers around a 2.5-month high
• GBP/USD tests 1.30 support

GBP/USD is rising, recovering some of yesterday’s losses as the USD rally pauses for breath.

However, GBP gins could be limited after the latest public finance figures highlight the pressures on Chancellor Rachel Reeves ahead of next week's budget.

The UK posted a larger government deficit than expected in the first half of the fiscal year, putting pressure on the Chancellor to raise taxes and borrow more to cover high spending.

Public sector net borrowing was -£16.6 billion, below expectations of -£17.5 billion, but the deficit is still the third-highest borrowing on record for the month.

Attention will also be on Bank of England Governor Andrew Bailey, who is due to speak later today. The last time that Bailey spoke, at the start of October, he sent the pound sharply lower, saying that the central bank could cut rates more aggressively if inflation data allowed it. With inflation now below the BoE’s 2% target, Bailey could point to further rate cuts. However, he may also adopt a cautious approach ahead of the October 30 budget.

The USD is hovering around a 2.5-month high on Tuesday, based on expectations that the Federal Reserve will adopt a slower approach to cutting interest rates. The upcoming US elections are also keeping investors on edge.

Rising treasury yields have boosted the U.S. dollar after recent data showed that the US economy continues to be in a good place. This could mean that the Fed won’t be able to cut rates as rapidly as initially expected.

Fed speakers expressed support for further cuts but differed over the timing of those cuts, which points to more mixed views at the Fed meeting in November. Markets are pricing in an 89 percent chance of the Fed cutting rates by 25 basis points next month, down from a 50% chance just a month earlier, when investors also considered the Fed may cut rates by 50 basis points.

GBP/USD Forecast – technical analysis

GBP/USD fell from 1.3420 high at the start of October and continues to test the key 1.30 psychological level support. Below 1.30, a lower low is formed.

Sellers supported by the RSI will look to take out this level and the 100 SMA at 1.2960 to expose the rising trendline support at 1.29.

Buyers will look to defend 1.30 to recover towards 1.31, last week’s high, and on towards 1.32, the round number.

DAX hovers around record highs ahead of Lagarde & IMF growth forecasts

• ECB Christine Lagarde is due to speak
• IMF global growth forecasts will be released
• DAX eases from its record-high

The DAX and its European peers have opened lower as concerns over geopolitical tensions and macroeconomic uncertainty offset a possible boost from positive earnings.

With the US election just two weeks away, traders are showing signs of nerves. They also question the Federal Reserve's ability to lower interest rates as fast as they initially expected.

Meanwhile, the DAX has been supported by lower interest rates after the ECB cut rates for a third time last week. ECB president Christine Lagarde is due to speak today along with chief economist Philip Lane and several other ECB officials. Investors will be looking for further insight into the ECB’s plans for future rate cuts. The markets expect the ECB to cut rates again in December as its focus shifts away from inflation and towards the deteriorating growth outlook.

German PPI data yesterday showed that wholesale inflation fell -1.4% YoY, more than the expected- 0.8%. The data pointed to a weaker demand environment.

On the company front, shares in SAP were up 4.4% after the German software company raised its full-year targets based on its strong cloud business.

Today, the German economic calendar is quiet. Instead, attention will be on the IMF's release of its World Economic Outlook figures, where growth projections for both China and the US could influence demand for the darks. Expectations of 5% growth in China and a resilient U.S. economy could help the ducks back up towards all-time highs.

DAX forecast – technical analysis

The DAX consolidates below yesterday's record high of 19.680. Supported by the RSI above 50, buyers will look to extend gains above her to fresh record highs.  However, the price remains above the 19,480 level, which sellers would need to break below to negate the near-term uptrend. Below here, 19000 comes into focus.