**GBP/USD Edges Higher Despite Soaring UK Borrowing as Market Focuses on BoE Outlook**
*By Nick Cawley, Forex Factory*
The British pound edged higher against the US dollar on Tuesday, defying concerns around mounting UK public borrowing figures. The move underscores how market participants are currently prioritizing monetary policy expectations over domestic fiscal headwinds, as the Bank of England (BoE) prepares for a critical interest rate decision later this week.
### UK Borrowing Surges Past Forecasts
Data released Tuesday by the Office for National Statistics (ONS) revealed that UK public sector net borrowing (excluding state-owned banks) reached £17.9 billion in May, exceeding both market estimates and last year’s figure of £14.8 billion for the same month. This was the highest May borrowing since monthly records began in 1993, and over £800 million more than the £17.0 billion consensus among economists.
#### Key points from the borrowing data:
– Public borrowing in May 2024: £17.9 billion (vs. £17.0 billion expected)
– May 2023 figure: £14.8 billion
– Highest May figure since at least 1993
– Sharp rise partly attributed to increased government spending and higher interest payments on inflation-linked gilts
The data highlights persistent fiscal challenges facing the UK government, which has witnessed elevated borrowing needs amid tepid economic growth, high inflation, and substantial public spending initiatives. Chancellor Jeremy Hunt remains under pressure to balance commitments to fiscal prudence with calls for increased investment in critical public services. The headline borrowing number is now tracking above the Office for Budget Responsibility’s full-year forecast, raising questions over whether fiscal targets set out for 2024-2025 can be met.
### Market Shrugs Off Fiscal Concerns as BoE Decision Looms
Despite the weak fiscal backdrop, GBP/USD ticked up during London trade, briefly touching the 1.2720 area before consolidating. The British pound’s resilience reveals a dominant market narrative: monetary policy guidance from the Bank of England is currently exerting a stronger influence over FX pricing than UK fiscal slippage.
#### Recent GBP price action
– GBP/USD climbed modestly after release of borrowing data
– Cable reached intraday highs near 1.2720
– The pair outperformed against risk-sensitive currencies, and even made headway against a broadly steady US dollar
Investors remain keenly focused on Thursday’s BoE policy announcement. Most economists anticipate that the nine-member Monetary Policy Committee (MPC) will leave rates on hold at 5.25 percent for a seventh consecutive meeting, but there is now increased debate around the timing of the first rate cut.
The prospect of an interest rate cut, either as early as August or pushed out to later in the year, has become a pivotal driver for sterling crosses. Pricing in rates markets shows traders are split, with overnight index swaps assigning about a 40 percent chance of a 25-basis-point move in August, and a BoE rate cut fully priced in for November.
### BoE Strategy: Wait-and-See or Cut Early?
Market participants and analysts expect Thursday’s BoE statement and accompanying minutes to offer crucial clues about the committee’s reaction function to recent economic data. Key questions include whether the MPC will signal increased readiness to ease policy, or continue to wait for more concrete evidence of declining inflation and slackening wage growth.
#### Arguments for an earlier BoE rate cut:
– UK inflation surprised to the downside in May, slowing to the 2 percent target for the first time in nearly three years
– Signs of cooling in the labor market, including plateauing wage pressures
– Easing of energy price shock that contributed to past inflation surges
– Subdued UK GDP growth and lacklustre business investment signal potential need for support
#### Arguments for a more cautious approach:
– Underlying services inflation and wage growth remain above levels consistent with the BoE
Read more on GBP/USD trading.