The British pound extended its losses against the US dollar on Tuesday, dipping to $1.325, its weakest level in three months, amid renewed concerns over the United Kingdom’s fiscal outlook and expectations of a Bank of England (BoE) rate cut.
Market analysts said the decline was primarily driven by speculation that the BoE could begin monetary easing as early as next week. The GBP/USD exchange rate fell more than 0.5% after the Office for Budget Responsibility (OBR) hinted at plans to revise productivity forecasts downward — a move that could deepen the UK’s fiscal gap.
The sterling slipped below the 1.3300 mark for the first time since October, while traders looked ahead to the BoE’s policy meeting slated for November 6. Current market pricing reflects roughly a 68% probability of a 25 basis-point rate cut in December, according to overnight swaps data.
Although the pound’s weakness has persisted, expectations of a US Federal Reserve rate cut this week have limited further downside pressure. The CME FedWatch Tool now indicates a 70% chance of a Fed rate reduction following a weaker-than-expected US jobs report earlier this month.
Currency analysts note that the evolving fiscal and monetary landscape in both the UK and the US could set the stage for heightened volatility in the coming weeks. “Traders are eyeing opportunities through straddles or strangles on GBP/USD ahead of the Fed and BoE decisions,” an FX strategist said, recalling similar conditions during the UK’s fiscal turmoil in late 2022.
The OBR’s planned downgrade of productivity growth by 0.3 percentage points could open a £20 billion gap in public finances, compounding fiscal pressures already weighing on the economy.
Meanwhile, the US Dollar Index (DXY) weakened after the latest US Consumer Price Index (CPI) report came in softer than expected and following a preliminary trade agreement between the US and China. The DXY fell to a three-day low near 98.70, rebounding slightly above 99.00 before stabilising within a tight 15-tick range.
Despite near-term consolidation, analysts suggest that dollar positioning remains constructive. However, with both the BoE and the Fed on the cusp of rate cuts, FX markets could face another round of sharp re-pricing across major currencies.
