The GBP/USD exchange rate has declined once more, approaching 1.3300, influenced by fresh speculation regarding potential rate cuts from the Bank of England and ongoing concerns about fiscal stability in anticipation of November’s Autumn Budget. Following the test of resistance at 1.3500, the pair experienced a significant reversal, prompted by weaker UK inflation data that initiated an early adjustment of the BoE’s policy trajectory. Headline inflation remained steady at 3.8% for the third month in a row—lower than market expectations of 4.0%—as core inflation decreased to 3.5% from 3.6%. The moderation bolstered expectations for a 25-basis-point cut by the BoE before the end of 2025, with futures indicating approximately 65 bps of easing by December. The dovish shift impacted sterling’s yield advantage and strengthened the downward trend in Cable, as the U.S. Dollar regained its footing due to resilient macro indicators and a firm stance from the Fed.
The current market assessment indicates a 40% probability of a Bank of England rate cut in November, a significant increase from the mere 10% observed earlier this month, highlighting the rapid shift in policy sentiment. Market participants observe that the central bank faces increasing pressure to adopt a more accommodative stance in light of the deceleration in wage growth and the uptick in unemployment, which currently stands at 4.5%. The yield spread between 10-year gilts at 3.89% and U.S. Treasuries at 4.02% has contracted to its narrowest point since 2022. The Federal Reserve is anticipated to reduce rates by 25 basis points to 4.00% later this week, while maintaining a stance of “higher for longer” through mid-2026. Core PCE inflation remains at 2.8%, while the latest U.S. non-farm payrolls report indicates an addition of 210,000 jobs. This positions the Fed with a robust growth and inflation outlook, thereby maintaining the dollar’s carry appeal. Sterling’s weakness is influenced by factors that go beyond just monetary policy. The UK’s debt-to-GDP ratio stands at approximately 98%, which provides Chancellor Hunt with limited fiscal flexibility as he approaches the Budget on November 26. Concerns are mounting in the markets that possible tax increases and reductions in spending may further diminish domestic growth momentum, which is already trailing at a quarterly GDP expansion of 0.2%. Experts from various leading institutions emphasize a continual “fiscal risk premium” present in sterling assets, noting that the pound is trading 1.5–2.0% below its fair value when compared to historical real-rate differentials.
Should the budget achieve fiscal discipline without resorting to severe austerity measures, that premium may diminish; however, any decline in credibility or growth projections could exacerbate volatility as the year concludes. The technical profile underscores this inherent vulnerability. GBP/USD is currently trading at $1.3317, positioned beneath the 50-day EMA of $1.3358 and the 200-day EMA of $1.3415, which indicates a medium-term bearish trend. The pair’s consistent inability to maintain levels above $1.3360 has led to increased selling pressure, driving prices down to $1.3280, where the next support level is identified at $1.3247. The RSI at 43 suggests constrained upward momentum, and the downward slope of both moving averages reinforces this observation. A sustained break below $1.3280 may lead to an extension of the correction toward $1.3150, aligning with the late-September lows. On the other hand, a recovery exceeding $1.3400–$1.3450 would be necessary to alter short-term sentiment to bullish and create potential for movement towards $1.3600, the upper limit of the summer range. The dollar’s recent strength is attributed to robust U.S. economic indicators, highlighted by the S&P Global Flash Services PMI at 55.2 and Manufacturing PMI at 52.2, both reflecting underlying resilience. Currently, the U.S. Dollar Index is positioned at approximately 98.90, showing consolidation close to the support level of 98.70 as market participants anticipate the forthcoming FOMC decision.
U.S. GDP growth is anticipated to reach 3.0% for Q3, in stark contrast to the UK’s lackluster performance. Meanwhile, upcoming consumer confidence and employment cost data later this week may determine if the dollar can continue its upward trajectory beyond the 99.14 resistance level. This divergence in momentum—robust U.S. growth contrasted with UK stagnation—remains advantageous for the dollar in the medium term, as the currency maintains its strength even in the face of declining inflation. The institutional divide illustrates the market’s ambiguity. UBS maintains a positive outlook on sterling, forecasting GBP/USD to reach 1.40 by mid-2026, contending that a significant portion of the fiscal stress is already “priced in.” The bank forecasts that fiscal consolidation will reinstate confidence following the budget and predicts a depreciation of the dollar after the conclusion of the Fed’s cutting cycle. In contrast, Wells Fargo takes a cautious approach, predicting a peak around 1.36 before declining to 1.30 by Q1 2027, referencing early BoE easing and ongoing political tensions. The bank anticipates that the Fed funds rate will stabilize at 3.25% through late 2026, indicating a potential resurgence in dollar demand following the conclusion of the easing phase. HSBC observes that although there are fiscal downside risks, “only an unpleasant surprise” could significantly harm sterling since the risk premium is already incorporated.