The British pound (GBP) held steady against the US dollar (USD) on Wednesday, consolidating near 1.3030 after a sharp 0.9% decline the previous day. Tuesday’s drop followed remarks from UK Chancellor Rachel Reeves, who warned that tax increases might be necessary to meet the government’s fiscal rules, unsettling investors already wary of the UK’s budget outlook.
At the time of writing, GBP/USD was trading around 1.3028, virtually unchanged on the day, as traders weighed political uncertainty in the UK against solid US economic data that continues to underpin the greenback.
Reeves’ comments reignite fiscal uncertainty
Reeves said the UK is facing significant fiscal challenges since her first budget, prompting questions about which taxes could be raised to ensure compliance with her fiscal framework. Analysts at Société Générale noted, “She is justifying tough decisions to come in the budget. The fact that this is happening at all means that manifesto pledges will not be followed to the letter.”
Meanwhile, expectations remain that the Bank of England (BoE) will keep interest rates unchanged at its next meeting. However, weaker-than-expected inflation data have revived speculation that the BoE could start easing policy before year-end to support growth.
Resilient US data bolsters dollar sentiment
In the US, recent data releases have reinforced the view that the economy remains robust. The ISM Services PMI climbed to 52.4 in October from 50.0 in September, signaling an expansion in the services sector for the eighth time this year. The Prices Paid component jumped to 70.0, the highest since October 2022, underscoring persistent inflationary pressures.
Meanwhile, the ADP National Employment Report showed that private-sector employment rose by 42,000 in October, beating expectations of a 28,000 increase and reversing the prior month’s downwardly revised 29,000 decline.
The solid data prompted traders to reduce bets on a 25-basis-point (bps) rate cut by the Federal Reserve (Fed) in December. According to market pricing, the probability now stands around 64%, compared with 68% before the ADP release.
GBP/USD technical outlook
From a technical perspective, downside risks remain in focus after GBP/USD fell below its 200-day Simple Moving Average (SMA) at 1.3254 last week. A decisive break below the 1.3000 psychological level could open the door toward the April 8 swing low at 1.2708.
On the flip side, a move above 1.3100 could ease immediate selling pressure and pave the way for a retest of the week’s high near 1.3139.
