GBP/USD Price Forecast - GBP to USD Stalls at 1.3496 as £18B UK Deficit Collides With Fed-Backed Dollar Strength

GBP/USD Holds Fragile Gains After Fed Cut, UK Borrowing Shock Deepens Risk

The pound continues to trade under pressure with GBP/USD hovering near 1.3496, up just 0.27% after bouncing off a two-week low at 1.3453. Sterling had briefly touched 1.3726 last week before collapsing on the back of the Federal Reserve’s quarter-point cut. While the cut initially weakened the dollar, Powell’s hawkish commentary and the Fed’s dot plot showing only one more cut through 2026 restored strength to the greenback. This forced the pair back below the 1.35 handle, a zone now proving decisive for near-term direction.

Fiscal Strain in the UK Adds Heavy Downside Pressure to GBP/USD

August borrowing numbers revealed a deficit of £18 billion, the highest August shortfall in five years, far above expectations of £12.8 billion. The cumulative fiscal year deficit has already hit £83.8 billion, overshooting the Office for Budget Responsibility’s projection of £72.4 billion for the first five months. Ten-year gilt yields surged to 4.70% and 30-year yields to 5.55% as investors priced in higher debt servicing costs. The fiscal deterioration comes at the same time consumer confidence fell back to -19 in September, reversing a brief uptick. With the UK Autumn budget weeks away, markets are bracing for whether Chancellor Rachel Reeves signals fiscal tightening or doubles down on spending.

Federal Reserve Hawkish Tilt Bolsters the Dollar and Weighs on GBP/USD

The U.S. dollar strengthened after retail sales data came in at +0.6% MoM versus +0.2% expected, while jobless claims undershot forecasts, pointing to ongoing labor market resilience. The Dollar Index (DXY) rebounded 0.18% to 97.47. U.S. 10-year Treasury yields remain elevated, anchoring demand for dollars against weaker peers. Traders now price in an additional 50 bps of cuts by year-end 2025, but the Fed’s communication is clearly calibrated to maintain inflation control rather than indulge markets. This hawkish bias is particularly punishing for GBP/USD, given the UK’s fiscal fragility and slower growth trajectory.

Bank of England Caught Between Inflation Risks and Labor Slack

The Bank of England kept rates unchanged at 4.00%, voting 7-2 in favor of holding. Two dissenters pushed for a cut to 3.75%, citing weakening labor conditions. GDP growth forecasts were downgraded to 1.2% for 2025 from 1.5%, while core CPI is expected to average 2.3% by year-end. Governor Bailey stressed that persistent services inflation limits scope for aggressive easing. This cautious stance initially steadied sterling, but with the fiscal blowout overshadowing, the pound resumed its decline. Market pricing suggests limited room for BoE easing, a divergence from Fed policy that favors the dollar.

Technical Outlook: GBP/USD Faces Heavy Resistance at 1.3520

The pair remains pinned under the 20-day SMA at 1.3520, with intraday support at 1.3442. Failure to hold above 1.3450 risks exposing 1.3415, the July swing low, followed by 1.3332 from early September. Momentum indicators are negative, with RSI still below 50 despite slight improvement. On the upside, bulls must reclaim 1.3559 to re-establish upward traction toward 1.3617. Current chart structure favors sellers unless sterling can close decisively above 1.3560.

Global Sentiment Divergence: U.S. Equities Rally While GBP/USD Slumps

The contrast between U.S. and UK assets is stark. The S&P 500 closed at 6,664 (+0.49%) and the Nasdaq 100 rallied 2.32% to 24,500, hitting fresh records, as global capital favored U.S. equities. In contrast, UK gilts sold off and sterling weakened. EUR/GBP broke above 0.87, marking a six-week high for the euro against the pound. The divergence underscores how investor preference remains anchored in U.S. growth and tech exposure, leaving GBP/USD vulnerable to further downside pressure.

Outlook: Sterling Vulnerable as Fiscal Shock and Fed Divergence Dominate

The combination of surging UK borrowing, weaker consumer sentiment, and cautious BoE policy leaves sterling fragile. GBP/USD faces downside risk toward 1.34, with the potential to extend losses if gilt markets remain unstable or if U.S. data continues to surprise on the upside. Only a credible fiscal path in the Autumn budget could alter sentiment. For now, the balance of risks keeps the bias bearish, making GBP/USD more likely a Sell on rallies unless it clears 1.3560 with conviction.

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