**GBP/USD Price Forecast: Sterling Holds 1.35 as Fed Pivot Offers Relief Amid UK Fiscal Strain**
*By Kim Seng, TradingNews.com*
The British pound (GBP) steadied above 1.35 against the US dollar (USD) this week, buoyed by a shift in tone from the Federal Reserve and moderating US Treasury yields. Nevertheless, the medium-term outlook remains clouded by concerns over the UK’s fiscal position, weak domestic growth, and lingering uncertainty regarding the Bank of England’s next moves.
### Fed Pivot Cools US Dollar Rally
After months of aggressive monetary tightening designed to tackle soaring inflation, the US Federal Reserve adopted a more cautious stance at its most recent policy meeting. The central bank left its benchmark rate unchanged, while Fed Chair Jerome Powell emphasized a data-dependent approach going forward and signaled a willingness to pause additional rate hikes if inflation were to decelerate further.
**Key takeaways from the Fed’s latest stance:**
– The US benchmark interest rate remains at multi-decade highs, but further increases appear less likely in the near term.
– Inflation has shown signs of peaking, with headline Consumer Price Index (CPI) readings moving closer to target levels.
– The Fed is closely monitoring the health of the labor market and broader economic activity, aiming to avoid overtightening that could trigger a recession.
– US Treasury yields retreated from their recent highs as investors priced in a slower pace of monetary tightening.
This shift offered the embattled pound some much-needed breathing space. As the USD’s relentless rally paused, GBP enjoyed inflows, enabling the currency to break back above the psychologically significant 1.35 threshold. Market participants viewed the moderation in the US monetary tightening cycle as positive for risk-sensitive currencies and developed market peers struggling with domestic challenges.
### UK Fiscal Concerns Emerge
Despite the relief rally, the outlook for the pound remains uncertain. The UK government faces mounting fiscal headwinds, stemming from a combination of weak economic growth, sensitive public finances, and the lingering costs of pandemic-era spending.
**Details of the current UK fiscal situation:**
– The UK’s budget deficit remains elevated, with debt-to-GDP ratios at their highest levels in decades.
– Recent data points to sluggish economic output, suggesting the risk of a technical recession or protracted stagnation.
– Tax receipts have underperformed expectations, limiting the government’s capacity to boost spending or implement meaningful fiscal stimulus.
– Higher borrowing costs, stemming from the global rise in interest rates, have increased the cost of servicing existing public debt.
Chancellor Jeremy Hunt and his department have been under pressure to demonstrate fiscal prudence. However, the balancing act is delicate. Aggressive spending cuts threaten to undermine already weak demand, while further tax increases could stifle business investment and consumer spending.
### Market Sentiment: The Tightrope Act
Investor sentiment towards sterling is now being pulled in opposing directions by external and domestic forces. While the Fed’s new dovish tone provides a tailwind, persistent concerns about the UK economy cap any meaningful appreciation beyond the recent 1.35 recovery.
**Drivers shaping GBP/USD sentiment include:**
– External demand for higher-yielding and undervalued currencies as the USD rally falters.
– Heightened risk aversion amid fears of a global slowdown and geopolitical tensions.
– Domestic bearishness fueled by soft UK macroeconomic data and increasing speculation about how the Bank of England may respond.
– Foreign investors closely monitoring the credibility of UK fiscal policy, especially given the recent political instability and policy U-turns.
### Bank of England’s Dilemma
The Bank of England (BoE) faces a nuanced predicament. Inflation remains elevated even as growth sputters, resulting in a policy conundrum. The central bank has signaled it is nearing the end of its rate hiking cycle but remains cautious, wary that prematurely loosening policy could result in a resurgence of inflationary pressures.
**Factors influencing BoE policy:**
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