GBP/USD has fallen to a new two-month low around 1.3280, representing its most significant drop since late August. The ongoing fiscal pressures in the U.K. continue to be a primary factor contributing to this weakness, as investors prepare for the Autumn Statement in November. Chancellor Rachel Reeves is anticipated to reveal new tax increases intended to address the expanding public deficit. Market sentiment shifted significantly towards a risk-off stance as apprehensions mounted that additional fiscal tightening might stifle economic momentum, which is already under pressure from stagnant productivity and subdued consumption. Recent data indicated that U.K. GDP contracted by 0.1% in Q3, underscoring the vulnerability of the recovery. In September, inflation saw a slight decrease to 2.8%, yet wage growth continues to be high, compelling the Bank of England to uphold its restrictive policy for an extended period. BoE policymaker Catherine Mann reinforced that view, emphasizing that “high inflation itself is behind scarring, income uncertainty, and weak consumption growth,” confirming that monetary policy will remain tight to ensure price stability.
The U.S. dollar index remained close to 99.56, marking a two-month peak, bolstered by robust safe-haven demand due to political instability in France and Japan, alongside an ongoing U.S. government shutdown that has now reached its ninth day. In light of dovish expectations for additional Federal Reserve rate cuts before the end of the year, investors are still favoring the greenback, attributing this preference to its relative macro stability. Reports indicates that markets are assigning an 80% likelihood to a 50-basis-point cut by December, yet the Federal Reserve continues to exercise caution. Officials John Williams and Mary Daly recognized that the existing monetary policy is restrictive, while Governor Michael Barr cautioned against “excessive easing” considering that inflation is not expected to reach the 2% target within the next two years. The University of Michigan Consumer Sentiment Index experienced a minor decline, registering at 55.0 in October compared to 55.1 in September, which remains above the anticipated figure of 54.2. The current mixed macroeconomic landscape enables the Fed to rationalize a measured easing strategy, all while preserving the strength of the dollar as international investors pull back from risk-sensitive investments. GBP/USD has decisively fallen below the 200-day exponential moving average around 1.3300, continuing its downward trend towards significant support at 1.3280. Momentum indicators, such as the Relative Strength Index at 36, indicate ongoing bearish pressure without suggesting any signs of oversold exhaustion. The 50-day EMA has also begun to decline, indicating a medium-term trend reversal from the September peak of 1.3620.
Analysts observed that the significant decline has heightened downside momentum, forecasting possible extensions to 1.3245 in the near term and 1.3200 as the subsequent key target should bearish momentum continue. Minor resistance is observed at 1.3330, while a more significant selling interest is noted around 1.3410. Unless Sterling reclaims the 1.3460–1.3500 zone, the directional bias remains firmly negative. The differing monetary perspectives of the Bank of England and the Federal Reserve continue to be the main macroeconomic factor contributing to the weakness of GBP/USD. Although both central banks are anticipated to relax their policies through 2026, the Fed’s more robust labor market and more developed capital markets have enabled it to sustain a yield advantage. In September, U.S. non-farm payrolls experienced an increase of 250,000 jobs, highlighting the economy’s resilience. Concurrently, U.S. 10-year Treasury yields remain above 4.50%, enhancing the dollar’s appeal from a carry perspective The U.K. is experiencing tightening fiscal conditions that restrict the flexibility of the BoE. Given the near stagnation of growth and anticipated tax increases likely to dampen demand, markets have factored in a modest 25-basis-point rate cut by March 2026, in contrast to the 100 basis points of Fed easing projected for the same period. This divergence persists in hindering GBP/USD’s upward momentum.
The pound continues to face significant challenges due to fiscal instability. Investors express concern that increased corporate and income taxes may diminish domestic investment, especially given that National Insurance contributions have already risen to 15%. The ongoing political infighting within the ruling Labour Party regarding fiscal discipline contributes to increased volatility as we approach the November budget. Commerzbank indicates that disagreements among Western governments regarding fiscal frameworks are expected to “occupy markets for months,” which will likely maintain pressure on GBP/USD. At the same time, there has been a notable increase in options market volatility, indicating heightened uncertainty regarding the U.K.’s policy credibility and investor confidence as we approach 2026.