The British Pound (GBP) extended its losses against the US Dollar (USD) on Friday, with GBP/USD touching a fresh seven-month low of 1.3097. Persistent demand for the Greenback, coupled with growing doubts over the United Kingdom’s (UK) fiscal outlook, has kept the pair under heavy selling pressure despite oversold technical conditions.
At the same time, the US Dollar Index (DXY) remains near a three-month high around 99.80, supported by a wave of risk aversion and reduced expectations for additional Federal Reserve (Fed) rate cuts this year.
Following Fed Chair Jerome Powell’s cautious remarks earlier in the week, traders have sharply scaled back bets on a December rate reduction — with the CME FedWatch tool now pricing a 63% probability of a 25-basis-point cut, down from over 90% a week ago.
Fed officials reiterate cautious stance
Fed policymakers maintained a hawkish tone on Friday. Cleveland Fed President Beth M. Hammack said she would not have supported this week’s rate cut, emphasizing that maintaining some level of policy restriction remains crucial to steering inflation back toward the 2% target.
Similarly, Atlanta Fed President Raphael Bostic noted that the Fed’s dual mandates — price stability and full employment remain “in tension,” underscoring the need for more progress before shifting to a neutral policy stance.
UK fiscal outlook weighs on the Pound
The Pound continues to face headwinds from growing fiscal concerns in the UK. The Office for Budget Responsibility (OBR) recently projected a 0.3% drop in productivity, which could expand the national budget deficit by approximately £21 billion by 2030.
The Institute for Fiscal Studies (IFS) also warned that the government faces an immediate £22 billion funding gap, potentially forcing Chancellor of the Exchequer Rachel Reeves to choose between raising taxes or increasing borrowing both politically challenging moves that would contradict the Labour Party’s campaign promises.
Policy divergence adds to Sterling’s struggles
The combination of the Fed’s cautious tone and mounting expectations for Bank of England (BoE) rate cuts has deepened the GBP’s downside momentum.
With fiscal constraints tightening and monetary policy likely to ease, the Pound remains vulnerable in the near term, leaving GBP/USD at risk of further declines if UK economic data fail to show meaningful improvement.
