British Pound weakens to near 1.3300 as UK fiscal deficit exceeds market expectations
- GBP/USD loses traction to near 1.3310 in Wednesday’s early European session.
- UK government borrowing rises ahead of the autumn budget, weighing on the British Pound.
- Fed’s Collins said a more restrictive policy stance is appropriate to bring inflation sustainably back to the 2% target.
The GBP/USD pair attracts some sellers to around 1.3310 during the early European trading hours on Wednesday. The British Pound (GBP) weakens against the US dollar (USD) as the UK’s fiscal outlook has worsened, piling pressure on UK Chancellor John Healey ahead of the first budget.
The UK Office for National Statistics revealed on Tuesday that UK public sector borrowing hit £18.27 billion in August, exceeding the market forecast of £15.35 billion a year prior and £2.04 billion in July. The August reading was higher than expected. The cumulative deficit from April to August reaches £77.3 billion, surpassing the Office for Budget Responsibility's projection by £8.1 billion.
UK Chancellor John Healey will face pressure to raise taxes or cut spending at next month’s budget, as soaring borrowing costs because of the Iran war and weaker growth have wiped nearly £12 billion off the UK government’s fiscal headroom.
The prospects of US interest rate hikes in the near term could lift the Greenback and act as a headwind for the major pair. Boston Federal Reserve (Fed) President Susan Collins said on Tuesday that "I now see an increased likelihood of future scenarios in which inflation remains notably above 2%.”
"The dollar's support from rates looks durable, but futures already price more tightening than the Fed's own projections, so the dollar now needs the data to confirm it," said Kieran Williams, head of Asia FX at Intouch Capital Markets.
UK Pound steadies as markets focus on fiscal outlook ahead of budget
Strategists at Scotiabank highlight that the UK’s fiscal backdrop remains central to market sentiment, noting that “the UK’s fiscal outlook remains a primary concern for markets as the government prepares its budget in advance of the October 28 release.” This focus on fiscal risks is helping to frame trading conditions for the Pound as investors await clearer signals on the government’s budget plans and their implications for GBP/USD.
Collins flags stronger labor market and persistent inflation risks, supporting a more restrictive Fed stance
Fed's Collins delivered a notably more hawkish tone, with an FXS Speechtracker score of 8.1 versus a historical average of 6.6, underscoring heightened concern about inflation staying above 2%. The explicit support for last week's rate hike and emphasis on increased upside risks to inflation, alongside a stronger labor market footing, signal a clear willingness to keep policy restrictive until PRICE STABILITY is credibly restored. The remark that a "somewhat more restrictive" FEDERAL FUNDS RATE is needed reinforces expectations that the DOLLAR will remain supported by a higher-for-longer rate profile.
The FXS Fed Sentiment Index rose by 0.53 points to 150.49, firmly in hawkish territory and well above the neutral 100 mark, consistent with the elevated FXS Speechtracker reading. This combination of a stronger index level and above-baseline speech score suggests that Fed communication is tilting further toward sustained tightening bias, a backdrop that typically underpins the DOLLAR against the EURO and YEN.
Technical Analysis: GBP/USD keeps a bearish vibe with oversold RSI
In the daily chart, GBP/USD presses against the lower Bollinger Band and retaining a bearish near-term tone as it holds beneath the 100-day simple moving average (SMA) and the Bollinger middle band. The Relative Strength Index (14) at 30.8 is flirting with oversold territory, which hints that selling pressure is stretched but still consistent with a downside-biased environment while price remains capped under these clustered resistance levels.
On the topside, initial resistance is seen at the 100-day SMA at 1.3432, followed by the Bollinger middle band at 1.3475, with the upper Bollinger Band near 1.3640 acting as a broader cap if a corrective bounce extends. On the downside, the immediate pivot is the lower Bollinger Band at 1.3315, and a sustained break under this boundary would open the door for a continuation of the slide toward lower, untested support levels not yet defined by the current indicator set.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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