Insights 
VT 
GBP/USD saw a fourth consecutive session of decline, trading around 1.3380 during Asian hours on Wednesday, as the UK CPI and Retail Price Index data for September approached. The Pound weakened due to UK borrowing exceeding forecasts by £7.2 billion in the first fiscal half, with the budget deficit at £99.8 billion, above the OBR’s £92.6 billion prediction.
In September, debt interest payments surged 66% to £9.7 billion, setting a record for the month. GBP/USD dipped back below 1.3400, with traders cautious over UK CPI inflation data due on Wednesday and US CPI data on Friday. Headline UK CPI inflation is expected to climb to 4.0% year-on-year, while core CPI is forecast at 3.7%.
Bank Of England Dilemma
The Bank of England faces limitations in addressing UK inflation amidst a recessionary outlook. On Tuesday, GBP/USD fell over 0.17% as the US Dollar rebounded, with traders cautious due to US CPI figures expected on Friday. Meanwhile, UK Public Sector Net Borrowing in September was £20.24 billion, slightly below the forecast of £20.5 billion.
We are seeing GBP/USD struggle to hold its ground, currently trading around 1.3380 as the market shows caution. The immediate focus for traders is the upcoming UK Consumer Price Index (CPI) data. This release will be critical in setting the tone for the Pound Sterling in the coming weeks.
The pressure on the Pound is worsened by the UK’s fiscal situation, with government borrowing exceeding forecasts by £7.2 billion in the first half of the year. This is not a new problem; we saw similar concerns throughout 2023 and 2024 when public sector net borrowing consistently ran high, reaching £119.1 billion in the financial year to December 2023. This long-term trend of high debt servicing costs, which hit a record for September, limits the government’s flexibility and weighs on the currency.
Market Strategies And US Dollar Influence
Traders should be prepared for volatility, as the Bank of England has very little room to maneuver. With headline inflation expected to come in around 4.0%, similar to the levels we wrestled with back in late 2023, the BoE is trapped. We remember how the Bank held rates at 5.25% for an extended period because these exact stagflationary pressures—high inflation and a weak economy—persisted.
Given the bearish sentiment and the uncertainty, derivative traders are likely positioning for further downside or, at a minimum, significant price swings. Buying GBP/USD put options could be a prudent strategy to hedge against a drop below key support levels, especially if the CPI data confirms persistent inflation without triggering a hawkish BoE response. Selling out-of-the-money call options is another approach for those anticipating that the pair’s upside will remain capped near the 1.3400 level.
The challenge for the Pound is not just domestic, as the US Dollar is also showing signs of rebounding. The US Dollar Index (DXY) recently hit a three-day high, adding external pressure on the GBP/USD pair. All eyes will now also turn to the US CPI figures due later this week, as a strong inflation print from the US could further accelerate this dollar recovery.
