GBP/USD Price Forecast - Pound Hits Seven-Month Low as Reeves’s Tax Warning Drive Pound Toward 1.3000

Pound Sterling (GBP/USD) Extends Decline to Seven-Month Low — Fiscal Jitters and Fed Strength Drive Sterling Below 1.3050 Ahead of BoE Decision

Sterling Slides Toward 1.3000 as Fiscal and Policy Worries Collide

The British Pound (GBP/USD) continued to weaken on Wednesday, slipping to 1.3041, its lowest level since April 2025, as traders priced in fresh fiscal uncertainty and growing divergence between the Bank of England (BoE) and the U.S. Federal Reserve. The move marked Sterling’s third consecutive weekly decline, pushing its two-week loss beyond 2.4%, the sharpest drop since November 2024. The currency’s downtrend intensified after UK Chancellor Rachel Reeves warned that “difficult fiscal choices” loom in her upcoming Autumn Budget, suggesting higher taxes may be required to stabilize public finances.

Reeves’s remarks fueled concerns about consumer demand and business investment at a time when UK GDP growth remains stagnant. The Pound’s slide was compounded by stronger U.S. data, which pushed the Dollar Index (DXY) to 100.08, its highest in three months, following better-than-expected ADP employment (+145K) and ISM Services PMI (52.4) readings. The result: Sterling was among the worst-performing G10 currencies on the day, underperforming both the Euro (EUR/USD 1.148) and the Yen (USD/JPY 154.04).

Macro Divergence Deepens as Fed Confidence Clashes with BoE Stagnation

The latest macro divergence between the U.K. and the U.S. has widened sharply. While the Federal Reserve appears committed to a cautious, data-dependent easing cycle, the BoE faces the opposite dilemma: inflation remains stubborn at 3.8%, nearly double the target, yet the economy flirts with recession. The market currently prices a 6–3 BoE vote to hold rates at 4.00%, with a growing minority expecting a surprise 25 bps cut before year-end.

Reeves’s budget warning coincides with a £22 billion fiscal gap in the UK’s public finances, and analysts fear that any fiscal tightening could exacerbate the downturn. The Chancellor’s refusal to rule out tax hikes on income, VAT, or national insurance has rattled consumer confidence. In contrast, U.S. yields remain elevated, with the 10-year Treasury at 4.15%, underscoring stronger relative returns for USD assets.

Technical Breakdown: RSI Oversold but No Sign of Reversal Yet

The technical landscape confirms the dominant bearish momentum. GBP/USD decisively broke below the 200-day SMA (1.3101) and the psychological 1.3100 handle, confirming a structural downtrend. The Relative Strength Index (RSI) sits near 25, deep in oversold territory, levels “that rarely hold for long” according to Scotiabank. Nonetheless, there is little evidence yet of a bottom forming.

Immediate resistance stands at 1.3033–1.3065, with support at 1.3000 (psychological) and 1.2884, the lower boundary of the previous April range. Momentum remains negative, and the MACD histogram continues to widen on the downside. Technical analysts at TradingNews identify 1.2980 as a potential intraday inflection point — failure to hold that zone would open the door to 1.2880, while a close above 1.3070 could spark a short-covering rally toward 1.3140.

Investor Sentiment: Oversold But Bearish Bias Holds

Market sentiment remains decisively bearish. The CFTC data show net GBP shorts rising to −48K contracts, the highest since August. Cross-asset correlations reveal heavy institutional rotation from Sterling to the U.S. Dollar and Swiss Franc as fiscal credibility questions linger. Still, several high-frequency trading desks highlight that the oversold RSI and sentiment index (IG data 81% short) could lead to short-term stabilization before Thursday’s BoE decision.

Currency strategists at ING warn that “the pound is entering a technically fragile zone where small fundamental shocks can trigger exaggerated moves,” while Nomura maintains a 3-month target of 1.2800, expecting the BoE to pivot dovish by early 2026.

Fundamental Pressure Points: UK Fiscal Credibility at Risk

The fiscal narrative dominates Sterling’s macro risk profile. Reeves’s pre-budget comments highlighted the need for “responsible consolidation,” but the market interpreted that as code for potential tax increases. With public borrowing costs already elevated — 10-year gilts yielding 4.25% — any policy perceived as anti-growth may accelerate capital flight from U.K. assets. Meanwhile, the U.S. economy remains robust, supported by resilient employment and service-sector strength.

The combination of tight U.S. monetary policy and weak U.K. fiscal optics amplifies downside risks for GBP/USD. Analysts agree that unless the BoE signals confidence in inflation returning to target without additional tightening, Sterling may struggle to hold above 1.3000.

Outlook: Limited Upside Before BoE, Risk of 1.2880 Retest

With the BoE decision due Thursday, markets anticipate limited recovery potential. If the central bank reiterates its cautious tone without offering forward guidance for cuts, GBP/USD could stabilize near 1.3050–1.3100. However, dovish language or acknowledgment of fiscal headwinds could trigger a sharper descent toward 1.2880–1.2900.

On a broader horizon, Sterling remains fundamentally undervalued relative to its 10-year fair value near 1.34, but structural headwinds — fiscal tightening, stagnant growth, and diverging yields — cap any immediate upside. The TradingNews.com technical model projects a 1-month range of 1.2880–1.3170, with volatility expected to spike around the BoE’s statement.

Support levels: 1.3000 / 1.2884 / 1.2700
Resistance: 1.3070 / 1.3140 / 1.3180
RSI: 25 (oversold) MACD: Bearish continuation Bias: Short-term bearish
Verdict: HOLD / SELL ON RALLIES until a confirmed daily close above 1.3140

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