GBP/USD sinks below 1.33 as UK fiscal woes deepen ahead of budget

• GBP/USD slides beneath 1.3300 for first time since mid-October amid weaker productivity outlook.
• OBR's plan to cut productivity forecasts widens fiscal gap, pressuring Chancellor Reeves before budget.
• Despite the dip, Fed-BoE divergence could limit losses as markets price a 25 bps Fed cut next week.

The GBP/USD dives more than 0.50% on Tuesday as market participants digested news of the UK's Office for Budget Responsibility (OBR), which plan to cut productivity, leading to a huge hole in the public finances. The pair tumbled below 1.3300 for the first time since mid-October.

Pound tumbles over 0.5% after OBR warns of £20B hit to public finances

The Dollar is downbeat during the North American session, amid the lack of a catalyst, linked to the Greenback. The US Dollar Index (DXY), which tracks its performance against a basket of six currencies, is down 0.10% at 98.70.

The US President Donald Trump continued his trip in Asia and signed an agreement with the Japanese Prime Minister Takaichi, on the US-Japan alliance and framework for securing the supply of critical minerals and rare earths.

In the UK, the OBR is expected to cut its productivity forecast by about 0.3%, equally to a £20 billion hit on the country's public finances. On this, ING said, "That automatically widens the fiscal hole that (finance minister Rachel) Reeves needs to fill with the Autumn budget."

Aside from those developments, central bank divergence favors further upside on the GBP/USD pair. The Federal Reserve is expected to reduce rates by 25 basis points at the October 28-29 meeting, leaving the fed funds rate at the 3.75%-4% range. Conversely, the Bank of England (BoE) is projected to hold rates at the November 6 meeting.

However, odds for a cut in December remain at around 35%, following last week's inflation print, which showed signs of stabilizing, before resuming its downward path.

GBP/USD Price Forecast: Poised to test 1.3200 in the short term

The GBP/USD shows signs of weakness, hoovering slightly above the 200-day Simple Moving Average (SMA) at 1.3233, which if cleared, it could pave the way for testing 1.3200. From a momentum standpoint, sellers have the upper hand, as the Relative Strength Index (RSI) turned bearish, continuing to trend lower.

Conversely, if GBP/USD climbs back above 1.3300, buyers need to drive the spot price above the 20-day SMA at 1.3380. Further upside lies above 1.3400.