GBP/USD Price Forecast - Sterling Slides to 1.3420 as U.S. Shutdown Drive Dollar Strength

GBP/USD Under Pressure as Political Turmoil in France and Japan Strengthens the Dollar

The British Pound (GBP/USD) continues to lose ground, falling to 1.3420 before modestly recovering to 1.3440 in London trading. The latest drop follows a sharp rally in the U.S. Dollar Index (DXY), which climbed to 98.50, supported by safe-haven demand amid escalating political instability in Europe and Japan. Traders are now focused on whether the pair can defend key technical support at 1.3400, a level that has repeatedly held over the past quarter. Any sustained break below that threshold could expose the September lows near 1.3335, while resistance remains capped at 1.3520.

France’s Political Meltdown Deepens Eurozone Risk Premium and Boosts the Greenback

The unexpected resignation of French Prime Minister Sébastien Lecornu after less than a month in office rattled European markets, driving investors out of the euro and into the dollar. The euro’s slide below 1.1650 added further upward momentum to the greenback, which has benefited from broad risk aversion. With French bond spreads widening by 15 basis points against German Bunds, traders are positioning for increased political uncertainty across the Eurozone, indirectly weighing on the pound through cross-currency correlations.

Japan’s Leadership Transition Weakens the Yen and Reinforces Dollar Demand

The yen tumbled nearly 2% after Sanae Takaichi secured victory in Japan’s LDP leadership contest, paving the way for a more expansionary fiscal approach and softer stance on Bank of Japan (BoJ) tightening. The result triggered renewed selling in the JPY, helping the dollar extend its rally across Asia-Pacific currencies. The USD/JPY pair surged toward 151.50, its highest level in seven months, as traders priced out any immediate policy normalization from Tokyo. This move spilled over into broader dollar strength, reinforcing downside pressure on the pound and euro alike.

U.S. Government Shutdown and Fed Expectations Create Mixed Dollar Dynamics

While the ongoing U.S. government shutdown has raised short-term concerns about data flow and fiscal drag, the dollar remains resilient. The lack of major U.S. data releases, including Non-Farm Payrolls and CPI, has left traders navigating without new macro signals, yet high Treasury yields continue to attract flows. The 10-year Treasury yield briefly touched 4.56%, while the 30-year climbed to 4.83%, supporting the greenback’s carry appeal. Analysts at ING note that “markets have significantly raised the threshold for what qualifies as bad news for the dollar,” indicating that the greenback’s upside bias remains intact despite Washington’s political gridlock.

UK Bond Market Pressure Intensifies as Gilt Yields Hit Multi-Month Highs

In the UK, bond markets are flashing warning signs. The 10-year gilt yield rose to 4.74% and the 30-year held near 5.56%, levels last seen during the post-mini-budget turmoil in 2022. Higher yields, while typically supportive of a currency, are now seen as symptomatic of fiscal strain rather than strength. Market participants fear that the Bank of England’s quantitative tightening is amplifying the sell-off, with large-scale bond disposals adding pressure to an already fragile market. Mark Dowding, CIO at RBC BlueBay Asset Management, criticized the BoE’s policy, stating: “You’re making the problem worse, not better. Stop doing this.” This dynamic leaves the pound vulnerable, particularly if financial conditions tighten further.

Technical Picture: GBP/USD Faces Key Breakdown Risk Below 1.3400

The short-term technical setup for GBP/USD is deteriorating. The pair has consistently failed to sustain momentum above 1.3475–1.3500, facing rejection near the 50-day moving average. On the downside, the 1.3365/70 zone marks the 61.8% retracement of the August rally, and a decisive break below that region could trigger a deeper selloff toward 1.3267/80, where the 78.6% retracement aligns with the August low-day close. Further support lies near 1.3125/43, representing the 100% extension of September’s decline. RSI readings below 50 confirm the loss of bullish momentum, reinforcing a bearish near-term bias.

Macro Drivers: Diverging Central Bank Paths and Inflation Persistence

The broader macro narrative continues to favor the dollar. While the Federal Reserve remains data-dependent, expectations for an October rate cut have faded, replaced by a cautious stance emphasizing inflation risks. In contrast, the Bank of England faces a delicate balance: UK inflation remains persistently high, with core CPI and wage growth both exceeding 6%, yet growth indicators signal stagnation. Markets currently price in just 6 basis points of easing by the end of 2025 and 37 basis points by 2026, implying that policy tightening has likely peaked. This asymmetry—U.S. resilience versus UK stagnation—keeps downside risks tilted against sterling.

Market Sentiment and Forward Guidance Outlook

Investor positioning reflects a defensive tone. According to CFTC data, net-long dollar positions have increased by 11% week-on-week, the sharpest uptick since March. Meanwhile, sterling futures show renewed short accumulation as traders hedge against prolonged weakness. The DXY’s breakout above 98.50 confirms strong demand for the U.S. currency even as equities hold near record highs. Traders will watch for upcoming FOMC minutes and speeches from Fed Governor Bowman and ECB President Lagarde for clues about global policy divergence.

Verdict: GBP/USD Bearish Bias — Sell Rallies Below 1.3500, Target 1.3335

Given the convergence of political stress in Europe, yen weakness, elevated U.S. yields, and domestic UK bond tension, the technical and macro picture points to continued downside in GBP/USD. A sustained move below 1.3400 could open the path to 1.3335, while any rally toward 1.3500–1.3530 is likely to face renewed selling. Unless the BoE adopts a more hawkish tone or U.S. shutdown concerns intensify meaningfully, the pair remains under pressure. Bias: Bearish — Sell on rallies below 1.3500 with downside target 1.3335.

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