British Pound loses momentum as fiscal and monetary headwinds mount

The British Pound (GBP) is facing a notable loss of upward momentum across major currency pairs as UK political headlines and fiscal concerns re-emerge. 

While the appointment of John Healey as Chancellor of the Exchequer under Prime Minister Andy Burnham was initially seen as market-friendly, subsequent signals regarding fiscal flexibility have unsettled the UK Gilt market. With the Bank of England (BoE) perceived as less hawkish than its European counterparts and key technical support levels yielding, major financial institutions are forecasting a period of range-bound trading for the British Pound.

Institutional Analysis: OCBC vs. UOB

Here is a breakdown of how analysts at OCBC and UOB view the currency's path forward:

• Political & fiscal drivers: OCBC highlights that Prime Minister Andy Burnham’s willingness to utilize "any flexibility" within fiscal rules (alongside plans for higher defense spending and reversing departmental cuts) presents clear friction ahead of the Autumn Budget. UOB focuses on immediate market sentiment, noting that recent technical breaks reflect fading momentum rather than aggressive selling.
• Monetary policy contrast: OCBC notes that while rising energy prices increase the likelihood of rate hikes across continental Europe, the BoE appears far less inclined to tighten policy, capping the British Pound’s relative yield advantage.
• EUR/GBP outlook: OCBC believes the recent slide in EUR/GBP to one-year lows has run its course, projecting a recovery toward 0.8700 over the coming months.
• GBP/USD outlook: UOB projects near-term consolidation within a 1.3385-1.3495 range, with broader multi-month support targets anchored down at 1.3210 and 1.3160.

Fiscal tensions and central bank divergence cap Pound upside

According to OCBC analysts, the British Pound's recent outperformance is reaching a ceiling. Although fiscal measures ahead of the Autumn Budget may remain modest in the immediate term, balancing defense commitments without breaching current spending rules will prove difficult. Combined with an asymmetric monetary policy outlook (where European peers face greater pressure to hike rates), Sterling lacks the catalyst for further sustained gains.

We continue to expect EUR/GBP to recover towards 0.87 over the coming months, in line with our broader view of a range-bound GBP. Higher energy prices raise the risk of additional rate hikes in Europe, but the Bank of England still appears less likely than its regional peers to tighten policy, limiting GBP upside.

Technical momentum cools as GBP/USD enters consolidation phase

From a technical perspective, UOB notes that GBP/USD is expected to trade range-bound after breaking through the key support level at 1.3450. Although the sell-off lacks strong downward impulse, the pair has transitioned into a well-defined range-trading environment.

The build-up in momentum has faded, and GBP has likely entered a range-trading phase between 1.3385 and 1.3495.

Banks expect range-bound trading with a downward bias for Sterling

The banks project a range-bound trajectory for the British Pound. OCBC anticipates that the recent EUR/GBP sell-off will reverse course, lifting the cross back toward 0.8700 as fiscal headwinds and BoE policy divergence weigh on the UK currency. UOB expects GBP/USD to remain locked between 1.3385 and 1.3495 over the next one to three weeks, warning that over a longer 1-3 month horizon, the loss of upside momentum leaves broader support levels at 1.3210 and 1.3160 vulnerable to testing.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)