GBP/USD pair has experienced a significant decline, decreasing by 0.80% to 1.3296, reaching its lowest point since early August. The decline reflects the overall surge of the U.S. dollar, as evidenced by the Dollar Index climbing to 99.51, marking its peak in nine weeks. This shift occurs as investors gravitate towards the greenback in response to global risk aversion and fresh fiscal worries in the United Kingdom. Hedge funds are currently amplifying their net long positions on the dollar as we approach year-end, anticipating a widening monetary divergence between the Bank of England and the Federal Reserve. The depreciation of Sterling is being exacerbated by internal issues as we approach Chancellor Rachel Reeves’ inaugural comprehensive budget on November 26.
Markets anticipate a package focused on fiscal tightening, with estimates of £18–20 billion in new taxes and stringent spending constraints designed to lower the UK’s deficit to under 3.5% of GDP by FY 2026. Investors are concerned that this strategy may hinder growth that is already stagnant. The UK’s most recent PMI Services reading decreased to 50.3, just above the contraction threshold, while manufacturing output contracted by 2.2% year-over-year, marking the third consecutive monthly decline. Consumer confidence is still delicate, and wage growth—once the BoE’s catalyst for inflation—has slowed to 6.1% YoY, marking its lowest point since 2023. The pound’s trajectory indicates a level of skepticism among investors regarding the sustainability of Reeves’ policies in an economy that continues to be affected by weak exports and post-Brexit supply frictions. Inflation continues to be the primary limitation for the BoE. The headline CPI remains at 4.0%, which is twice the central bank’s target, while core inflation at 3.6% persistently diminishes purchasing power. Huw Pill emphasized this week that policymakers “must maintain a conservative bias” and avoid premature easing. Markets are anticipating the initial rate cut to occur in April 2026, with an additional 25 bps reduction expected by the end of the year. Currently, the 2-year Gilt yield stands at approximately 4.23%, indicating a level of uncertainty among investors regarding the speed of disinflation. The current monetary environment offers minimal immediate assistance for GBP/USD, leaving it susceptible to the robustness of U.S. Treasury yields.
Across the Atlantic, the U.S. dollar’s surge has been bolstered by the Federal Reserve’s cautious stance and the lack of new economic data amid the ongoing U.S. government shutdown. Minutes indicated a strong consensus for an additional 25 bps rate cut; however, policymakers underscored the importance of a data-driven strategy. Fed Chair Jerome Powell’s pre-recorded speech did not provide explicit policy signals; however, John Williams emphasized that the Fed “has room to hold rates restrictive if inflation stabilizes above 2%.” The increase in 10-year Treasury yields to 4.62% bolstered demand for the dollar, exerting additional pressure on GBP/USD. The technical indicators suggest a prevailing bearish sentiment regarding GBP/USD. The pair has breached its multi-month trendline, pushing losses further into a critical support area ranging from 1.3330 to 1.3350. The 14-day RSI currently stands at 42.5, indicating that momentum is still negative. This suggests a possible continuation towards 1.3150, which corresponds to the lows observed in May and August, and is also in line with the 200-day Simple Moving Average. On the positive side, buyers encounter significant resistance at 1.3480, aligning with the 50-day SMA, followed by 1.3600, where the previous rally encountered challenges in mid-September. Unless the pound reclaims the 1.3400 threshold, technical traders are expected to uphold a sell-the-rally approach throughout October.
The divergence in global policy is contributing to the pressure on GBP/USD. While the U.S. exhibits monetary resilience, other prominent central banks are indicating signs of fatigue. The October minutes from the European Central Bank indicated a lack of urgency regarding further rate cuts, resulting in the EUR/USD trading around 1.1580, marking its lowest point in six weeks. Meanwhile, Japan’s yen (USD/JPY 153.08) continues to face pressure as yield differentials expand. The prevailing narrative of a stronger dollar therefore surpasses the localized weaknesses in the UK, indicating potential structural challenges for the pound. In commodity markets, Brent crude’s decline to $65.13—down 1.69%—provides a degree of inflation relief for the UK; however, the potential deflationary spillover poses risks for a more pronounced downturn in the industrial sector.