GBP/USD Price Forecast - Steadies at 1.3480 as Fed Cut Bets Surge, U.S. Yields Slide, and UK Fiscal Deficit Expands to £12.2 Billion

GBP/USD HOLDS ABOVE 1.3450 AS DOLLAR RETREATS AND RATE CUT BETS DEEPEN

The GBP/USD pair extended gains late Friday, trading near 1.3480, after a strong rebound from 1.3322, supported by broad U.S. dollar weakness and rising market conviction that the Federal Reserve will deliver another 25-basis-point cut at its October 29 meeting. The latest CME FedWatch Tool shows the probability of that cut now standing at 96%, as soft economic data and the ongoing U.S. government shutdown reinforce expectations that the Fed will have little choice but to ease further. The ISM Services PMI printed 50.0, its weakest reading since November 2023, while ADP employment data posted the sharpest monthly decline in over two years, underscoring deteriorating labor conditions. Treasury yields mirrored the slowdown — the 10-year yield fell to 3.68%, its lowest since May, while the 2-year yield slid under 3.95%, removing a key pillar of dollar strength and giving sterling space to rally.

FED DOVISH SHIFT WEAKENS THE DOLLAR, LIFTING GBP/USD

The greenback remains under pressure as investors digest a growing divide within the Federal Reserve. Vice Chair Philip Jefferson signaled caution about further tightening, while Adriana Kugler pointed to the risk of “oversteering” the economy into stagnation. In contrast, Dallas Fed President Lorie Logan warned that inflationary forces remain sticky, though her comments failed to reverse the dollar’s decline. For GBP/USD, the effect has been pronounced — the pair has risen nearly 1.2% this week, outperforming the EUR/USD, which stalled near 1.1750. With U.S. data fading and political volatility rising as the shutdown continues, investors are trimming long-dollar positions, allowing the pound to test the 1.35 zone for the first time since mid-August.

TECHNICAL STRUCTURE: POUND BUILDS HIGHER LOWS ABOVE 1.3322 AS BUYERS TARGET 1.3725

Technically, GBP/USD remains constructive. The pair continues to hold above its 76.4% and 78.6% Fibonacci retracement levels from the 2021–2022 decline, confirming the presence of strong support around 1.3320–1.3340. The market’s inability to close below that zone signals accumulation by institutional traders, who view it as a key pivot before a potential breakout toward 1.3535 and 1.3725. A decisive daily close above 1.3535 could unleash a momentum-driven rally targeting 1.3780, where price previously rejected in early spring. Conversely, a breakdown below 1.3320 would reintroduce bearish momentum, potentially sending the pair back to 1.3166, aligning with the 55-week exponential moving average, which has acted as medium-term dynamic support since May. The bullish bias remains intact as long as GBP/USD trades above 1.33 and the dollar remains on the defensive.

UK FISCAL POSITION REMAINS A HEADWIND AS INVESTORS WATCH SUNAK’S NEXT BUDGET

While short-term momentum favors sterling, domestic fundamentals present headwinds. The UK’s public borrowing widened more than expected to £12.2 billion in August, raising questions about fiscal sustainability just weeks ahead of the autumn statement. Prime Minister Rishi Sunak faces increasing pressure to maintain credibility after gilt yields briefly spiked above 4.15% earlier this week. The Bank of England, meanwhile, is stuck between stubborn inflation and weakening growth. CPI remains elevated at 3.4% year-over-year, and core inflation is still at 3.1%, while consumer confidence has slipped to a four-month low. Retail sales fell 0.3% in August, following a modest 0.1% gain in July, and real wage growth slowed to 2.1%, reflecting pressure on household spending. These dynamics could limit the BoE’s ability to maintain its 5.00% Bank Rate well into 2026, leading markets to price in a 25-basis-point cut by May 2026.

YIELD SPREADS AND POSITIONING SUGGEST ROOM FOR FURTHER GBP/USD UPSIDE

The UK–U.S. 10-year bond yield spread has narrowed to –67 basis points, its smallest gap in five months, which is supportive for GBP/USD in relative terms. As U.S. yields retreat, the interest rate differential that had driven capital into dollar assets is diminishing. According to the CFTC, speculative long positions on the pound rose by 8,700 contracts last week — the largest increase since July — signaling renewed confidence in sterling’s medium-term path. Hedge funds have also been seen adding exposure to GBP/USD around 1.3360–1.3380, using that range as a defensive accumulation zone. Volatility measures, such as 1-week implied vols, dropped to 7.2%, down from 8.4% a week ago, showing improved risk appetite and stabilizing sentiment ahead of next week’s FOMC minutes and BoE survey data.

CABLE’S MACRO OUTLOOK: BETWEEN DOVISH FED AND UK FISCAL RISK

The broader macro environment continues to favor the pound in the near term, though the sustainability of the move depends on political clarity and BoE communication. The delayed U.S. Nonfarm Payrolls report will deprive markets of crucial labor signals, keeping dollar bulls sidelined. Should the Fed confirm its rate cut path this month and maintain a dovish stance into December, GBP/USD could trade within a 1.34–1.37 corridor through Q4 2025. Conversely, any signs of fiscal slippage or weaker UK growth could trigger renewed selling toward 1.31–1.32, particularly if inflation expectations rebound and BoE credibility is challenged.

FINAL OUTLOOK AND STRATEGIC VERDICT ON GBP/USD

The technical and macro framework together suggest GBP/USD remains in a constructive hold pattern, with bulls gradually regaining control above 1.3450. As long as the pair stays above 1.3320, risk-reward favors upside toward 1.3725, though the broader range remains capped unless the Fed reinforces easing momentum. The 1.35 level is the short-term battleground — a clean break above it could invite momentum buying from macro funds, targeting 1.38 and later 1.40.

Verdict: HOLD with a BULLISH bias. Short-term traders can consider accumulating above 1.3360 with tight stops under 1.3280, targeting 1.3725 as a medium-term objective. Longer-term investors should monitor UK fiscal updates and U.S. inflation readings — if the Fed cuts while the BoE stays neutral, sterling could extend its recovery into early 2026. The balance of risk remains tilted in favor of gradual upside as the dollar loses its monetary advantage and global rate differentials compress in sterling’s favor.

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