GBP/USD Surges Past Key Resistance as Fiscal Risk and Fed Drama Clash
Sterling Climbs Above 1.35 Despite Soaring UK Borrowing
The GBP/USD pair defied fiscal gravity, climbing to 1.3504 even as UK government borrowing hit £20.7 billion in June, the highest since April 2021 and nearly £5 billion above the Office for Budget Responsibility’s £15.6 billion forecast. This spike, driven by elevated debt servicing costs and weaker-than-expected tax receipts, jolted fears of a looming autumn tax hike, likely to be central to Chancellor Rachel Reeves’ next fiscal package. The budget shortfall places mounting pressure on the Labour government’s promise to deliver fiscal responsibility without derailing public services. Yet, despite this rising deficit threat, the pound found strength — not from domestic optimism, but from a deteriorating U.S. dollar backdrop.
US Dollar Weakness Amplifies GBP/USD Breakout
The dollar index's tumble, which pulled DXY from 98.98 toward multi-month lows, coincided with a volatile political backdrop in Washington. Former President Donald Trump’s threats to oust Jerome Powell reignited fears of political interference at the Federal Reserve. While Trump later softened his stance, markets remain unsettled, especially after Powell was referred to the DOJ over perjury claims linked to inflation testimony. This turbulence came just ahead of the Fed's July 31 meeting, where Powell is now expected to strongly defend rate hold strategies. With two rate cuts still projected for 2025, traders appear increasingly unconvinced the Fed will hike again. These developments left the greenback exposed, pushing GBP/USD through the critical 1.3500 ceiling.
Technical Shift as GBP/USD Breaches Downtrend Channel
After weeks of tight consolidation, the pair exited a bearish correctional channel, supported by the EMA50 dynamic trendline. This breakout marked a significant shift in technical posture. Currently, GBP/USD hovers around 1.3500, with eyes now set on clearing the 50-day SMA at 1.3514. If bulls extend this rally beyond 1.3568 — the 20-day SMA — the 1.3600 barrier is next in sight. However, the RSI indicator now signals overbought territory, suggesting some caution is warranted. Should sentiment reverse, support lies near 1.3414, a level that recently anchored a rebound from the week’s low. A slide below this could reopen the 1.3395–1.3414 zone, but any sustained weakness would likely need fresh macro triggers.
Pound Outperforms G10 Peers as Risk Appetite Grows
Despite the borrowing blowout, the British pound outpaced all major currencies this week. On a relative basis, GBP gained 0.74% against the USD, 0.59% versus the yen, and even rose marginally against the euro (+0.32%). This outperformance reflects investor willingness to embrace risk assets as the Fed’s stance remains unclear and bond yields flatten. The GBP/USD recovery was also aided by reduced demand for traditional safe-haven plays like the Swiss franc and Japanese yen, with sterling acting as a mid-risk alternative, buoyed by still-stable services data projections.
UK Services Sector Expected to Print Strongest PMI Since 2024
Market attention now turns to Thursday’s S&P Global flash PMIs from both sides of the Atlantic. Analysts expect UK services PMI to climb to 53, a level not seen since August 2024, reinforcing hopes that the domestic economy can withstand tightening fiscal conditions. Manufacturing remains muted, but the services strength could counteract borrowing fears and inject fresh confidence into the pound. On the U.S. front, S&P Global PMIs, though secondary to ISM data, will be watched closely for signs of resilience. Any downside surprises in jobless claims or durable goods orders could further weigh on the greenback.
Fiscal Outlook Remains Fragile Despite OBR Reassurance
While the OBR attempted to soothe nerves by confirming that Q2 borrowing of £57.8 billion aligns with March forecasts, broader concerns remain. The report projects lower second-half borrowing thanks to stronger capital gains tax and falling interest costs, but economists warn the long-term risks persist. KPMG’s Dennis Tatarkov notes the government’s welfare reversals and slow economic growth could force more austerity or tax increases by November. This fiscal uncertainty forms the core risk for sterling in the coming quarter — one that investors are currently discounting due to U.S. dollar fragility, but that could swiftly reprice on any negative surprises.
Trump’s Tariff Deadline Adds FX Volatility Layer
Another key overhang is Trump’s August 1 tariff deadline. With new levies of 30% to 35% targeting the EU, Canada, and Mexico, trade war rhetoric has returned to the stage. However, the UK’s separate trade agreement with the U.S. shields it from these specific tariffs, which helped cushion sterling’s fall earlier in the week. Yet, broad-based global trade friction still risks dragging sentiment lower. Any escalation in tariff policy or retaliation from U.S. partners could spook markets, boost demand for the U.S. dollar short-term, and challenge GBP/USD’s newly won support above 1.35.
Market Volatility Builds Ahead of Powell Speech and FOMC
Investor focus is firmly fixed on Jerome Powell’s upcoming speech, widely expected to set the tone for the Fed’s next move. Markets currently price in two 25 bps cuts by year-end, but Powell’s tone will be critical. Should he reaffirm hawkish caution, some of the recent GBP/USD gains may be retraced. Conversely, any dovish pivot could accelerate the move toward 1.36, especially if paired with soft U.S. data.
Verdict: GBP/USD = BUY (Short-Term), HOLD (Mid-Term)
Backed by a politically battered dollar and unexpectedly strong services outlook in the UK, GBP/USD looks primed for another test of 1.3568–1.3600. The breakout above 1.35 is structurally important and supported by momentum indicators, despite RSI overextension. While UK fiscal risks remain high, they are not an immediate drag on price action due to the dollar’s vulnerability. Therefore, short-term positioning favors a bullish stance with tight stops below 1.3414, while mid-term caution is advised as fiscal and Fed uncertainty re-emerge in Q3.
