Key Takeaways
- The British Pound Sterling (GBP) is facing downward pressure against major currencies this week due to concerns about escalating fiscal risks in the UK.
- The Office for Budget Responsibility (OBR) forecasts a decline in economic productivity, potentially widening the fiscal budget gap.
- The Institute of Fiscal Studies (IFS) highlights a significant shortfall in government finances, potentially requiring tax increases or increased borrowing.
- These fiscal concerns could force Chancellor Rachel Reeves to deviate from her stated fiscal rules, impacting household confidence.
- The GBP/USD pair is trading near a six-week low, influenced by a strengthening US Dollar and optimism around a US-China trade deal.
UK Fiscal Concerns Impacting the Pound Sterling
The Pound Sterling (GBP) has experienced a challenging week, trading under pressure against its major currency peers. Investors are focusing on the potential fiscal risks facing the United Kingdom, with uncertainties surrounding the upcoming budget announcement expected in November.
Recent forecasts from the UK Office for Budget Responsibility (OBR) suggest a potential decline in the nation’s economic productivity by 0.3%. This projection could lead to an increased fiscal budget deficit, estimated to widen by £21 billion by the 2029-2030 fiscal year.
Potential Fiscal Shortfall and Policy Dilemmas
This developing situation is fueling concerns that Chancellor of the Exchequer Rachel Reeves may be compelled to adjust or break her self-imposed fiscal rules. Such a move could potentially undermine confidence among households.
The Institute of Fiscal Studies (IFS) has identified an existing shortfall in the government’s finances, estimated at £22 billion. This deficit may need to be addressed through increased borrowing or by raising taxes on working individuals.
The choice between these options, or a combination thereof, would place Chancellor Reeves in a difficult position, potentially contravening the Labour Party’s manifesto. The party had previously pledged not to increase income tax, National Insurance (NI), or VAT for working people, and committed to avoiding borrowing for day-to-day public spending.
GBP/USD Dives Towards Six-Week Lows
The Pound Sterling has extended its downward movement against the US Dollar (USD), marking the fourth consecutive day of losses for the GBP/USD pair. The currency pair is currently trading close to a fresh six-month low of 1.3116, recorded on Thursday.
Several factors are contributing to the pressure on the Cable, including a strengthening US Dollar. This is partly driven by diminishing expectations for further dovish monetary policy from the Federal Reserve (Fed) for its December meeting, alongside positive developments in the trade negotiations between the United States and China.
📊 The US Dollar Index (DXY), which measures the Greenback’s performance against a basket of major currencies, remains near a near three-month high of approximately 99.70. This indicates a robust market sentiment favoring the US Dollar.
Federal Reserve Policy and Trade Deal Optimism
Market participants have scaled back their bets on additional interest rate cuts by the Federal Reserve in December. This shift follows comments from Fed Chairman Jerome Powell, who indicated that another rate cut is not a certainty for the remainder of the year. During the post-monetary policy press conference on Wednesday, Powell noted that a December cut was far from assured, following a 25 basis point reduction that brought the target interest rate to the 3.75%-4.00% range.
The probability of a 25 basis point Fed rate cut in December has decreased to approximately 72.8%, down from 91.1% in the preceding week, according to the CME FedWatch tool. This reassessment reflects a less dovish outlook from the central bank.
⚡ In parallel, US Treasury Secretary Scott Bessent expressed optimism regarding a trade deal between Washington and Beijing. He indicated that an agreement was finalized and suggested that signatures could be exchanged imminently, possibly as early as the following week.
Looking ahead, market participants will closely monitor speeches from Federal Reserve officials Raphael Bostic and Beth Hammack during the North American trading session for further insights into monetary policy direction.
Technical Outlook for GBP/USD
The Pound Sterling is exhibiting vulnerability against the US Dollar, trading near its six-month low of approximately 1.3115. The technical picture for the GBP/USD pair remains bearish, with the price trading below the 200-day Exponential Moving Average (EMA), which currently stands around 1.3270.
💡 The 14-day Relative Strength Index (RSI) continues its decline below the 40.00 level, signaling the emergence of fresh bearish momentum in the market.
📍 Key support is anticipated around the significant psychological level of 1.3000. On the upside, resistance is expected near Tuesday’s high of approximately 1.3370, acting as a potential barrier to any upward price movements.
Expert Summary
The British Pound is under significant pressure due to concerns about the UK’s fiscal health and potential policy shifts. While the US Dollar strengthens on reduced Fed dovishness and trade deal optimism, the GBP faces technical headwinds suggesting further downside potential. Investors are awaiting key economic indicators and central bank commentary for future direction.