Sterling Drops: GBP/USD Price at 1.3480 on Fiscal Shock and Fed-Backed Dollar Strength

The GBP/USD pair slid to 1.3480, its lowest in 10 days, before stabilizing near 1.3500, after fresh data showed UK government borrowing hit £18.0 billion in August, the highest August deficit in five years. The Office for Budget Responsibility had forecast just £72.4 billion in borrowing for the first five months of the fiscal year, yet the actual shortfall already reached £83.8 billion, amplifying concerns about fiscal sustainability and driving a selloff in gilts. Ten-year gilt yields jumped to 4.70%, while 30-year yields touched 5.55%, putting further downward pressure on Sterling.

Fiscal Fears and Sterling’s Weakness Against Dollar and Euro

The pound’s decline extended beyond the U.S. dollar, with EUR/GBP breaking above 0.87, a six-week high for the euro against sterling. Analysts warn the fiscal trajectory could push the UK deeper into a “doom loop,” where higher yields increase servicing costs, compounding the deficit. Market strategists argue the fiscal imbalance now overshadows temporary boosts like stronger-than-expected UK retail sales (+0.5% MoM), while consumer confidence fell back to -19 in September, from -17 the prior month.

Federal Reserve’s Hawkish Tilt Supports Dollar Strength

The U.S. Federal Reserve’s 0.25% rate cut initially pushed the dollar lower, but comments from Chair Jerome Powell signaled inflation risks remain. The Fed’s “dot plot” suggests only one rate cut in 2026, down from previous expectations of two, bolstering the greenback. As a result, the Dollar Index rebounded, placing additional strain on GBP/USD. The market now prices in at least two more cuts by year-end 2025, but the hawkish tilt continues to anchor U.S. yields and demand for dollars.

Bank of England Divided and Cautious

The Bank of England voted 7-2 to hold rates at 4.00%, with dissenters calling for a cut to 3.75% due to slack in the labor market. Governor Andrew Bailey reiterated that inflation in services remains persistent, preventing aggressive easing. The BoE’s Monetary Policy Report lowered GDP forecasts to 1.2% for 2025 (from 1.5%), projecting core CPI at 2.3% by year-end. Sterling’s muted response turned negative as investors judged the BoE’s stance insufficient against surging fiscal risks.

U.S. Data Provides Tailwind for the Dollar

Stronger-than-expected U.S. retail sales (+0.6% MoM vs 0.2% expected) highlighted ongoing resilience in the American economy, while unemployment claims came in lower than forecast, further supporting sentiment. Combined with upgraded U.S. growth projections from the Fed, these data points reinforce dollar demand against weaker currencies like GBP.