**GBP/USD Price Forecast: Pound Slips as Deficit Fears Wobble Sterling**
_Source: Article by Joel Frank, Currency News UK, July 22, 2024_
The British pound has experienced fresh downward pressure against the US dollar, as anxieties over the UK’s government spending deficit have resurfaced. These renewed deficit concerns have sparked volatility in the GBP/USD pair, leading market participants to assess the outlook for sterling as global investors reconsider the stability of the UK’s fiscal trajectory.
**Key Drivers of Sterling’s Weakness**
This week’s price action in the GBP/USD pair reflects a culmination of factors influencing sterling performance:
– **Deficit jitters**: Growing worries about the UK’s expanding budget deficit and the durability of fiscal support.
– **Political landscape**: Ongoing uncertainty after the general election and questions about the Labour government’s fiscal strategy.
– **US dollar strength**: Renewed appetite for the USD driven by robust American economic data and rising safe-haven demand.
– **Bank of England policy path**: Divergence in interest rate policy with markets reassessing potential Bank of England (BoE) rate moves against sticky UK inflation.
Each of these forces has contributed to the weakening of GBP/USD, with traders cautious about the pound’s ability to stage a meaningful rebound in the near term.
**Mounting UK Deficit Fears**
Recent official data have brought the UK’s fiscal position under scrutiny:
– The Office for National Statistics (ONS) reported that UK public sector borrowing remains elevated, with figures for June showing a higher-than-expected shortfall.
– The UK’s debt-to-GDP ratio now sits at its highest sustained levels since the 1960s, well above 97 percent.
– Worries have surfaced over the cost of servicing government debt as interest rates remain comparatively high, and the BoE continues to unwind its quantitative easing program.
– Analysts cite the Labour government’s commitment to boosting infrastructure, healthcare, and climate-related spending as adding further upward pressure to near-term deficits, despite pledges to avoid significant tax hikes.
Investors have become increasingly wary that unchecked spending coupled with high rates may make UK assets less attractive. This has contributed to outflows and additional selling pressure on the pound.
**Market Reaction: Sterling Slides Lower**
April’s GBP/USD rate was trading above 1.2850, but the pair has since been trending downwards as the tide of sentiment turned. As of publication, GBP/USD is changing hands closer to the 1.2600 level. This marks a notable drop from multi-week highs earlier in July.
**Key Technical Levels**
A look at the GBP/USD charts reveals several short-term technical levels that market watchers are monitoring:
– **Immediate support** sits at 1.2570, with further downside toward 1.2500 should selling intensify.
– **Resistance** now lies at 1.2680, with a move above that level needed for the pound to reclaim a more constructive outlook.
– The 200-day moving average — a closely tracked indicator of trend — is currently positioned just above 1.2600. A sustained break below this marker could signal additional downside risk for sterling.
**Investor Sentiment: Wariness and Defensive Positioning**
According to foreign exchange strategists, speculative accounts and institutional investors have:
– Raised net short positions on GBP as reflected in recent CFTC Commitment of Traders (COT) reports.
– Shifted their hedging strategies to guard against a deeper decline in the pound in the event fiscal slippage further undermines UK credibility.
– Diversified into other major currencies — particularly the US dollar, Swiss franc, and Japanese yen.
UK government bond (gilt) yields have also risen in response to the deficit news. The spread between UK and US two-year sovereign yields has widened, making UK assets look less attractive relative to their US counterparts.
**Labour’s Fiscal Policy Risks and Market Reappraisal**
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