**GBP/USD Surges Past 1.35 as UK Deficit and Demand, Fed Drama Collide**
*By TradingNews Staff, originally published on TradingNews.com*
The British Pound (GBP) made a robust run against the US Dollar (USD) this week, soaring past the key psychological barrier of 1.35—a milestone not seen in recent months. The dynamic interplay between the United Kingdom’s swelling fiscal deficit and mounting demand for the Pound, combined with seismic developments from the US Federal Reserve, powered this move in forex markets. As traders contend with both sterling-specific and global factors, the GBP/USD pair stands at the epicenter of a complex tug-of-war.
### Macro Backdrop: UK Deficit in Focus
The foundation of GBP’s recent rally has been laid partly by the UK’s fiscal health—or lack thereof. Recent data from the Office for National Statistics (ONS) revealed that the UK government’s budget deficit ballooned more than expected in the latest quarter, reaching levels that diverged from both Bank of England (BoE) and market forecasts. Still, the broader economic context complicated the picture:
– **Government borrowing rose to £25 billion** in May alone, the highest figure for that month since records began in 1993.
– The debt-to-GDP ratio hit **97.2 percent**, the worst since the early 1960s.
– Markets saw a **modest increase in bond yields**, with the 10-year gilt yield trading near 4.2 percent.
Historically, such fiscal readings might have precipitated a decline for the pound. Instead, the currency has found unexpected support—pointing to the role of international capital flows and shifting monetary policy expectations.
### Sterling’s Demand Rises
Despite the UK’s fiscal deterioration, the GBP has garnered demand from multiple avenues:
– **Portfolio investment flows** have turned positive, as UK equities and business assets appear attractively valued relative to their US and EU counterparts.
– **Speculators have increased net long positions** on the pound, according to the latest Commitments of Traders (COT) data. As of last week, speculative net longs climbed to their highest since mid-2023.
– A round of **corporate bid activity**, with several high-profile mergers and acquisitions targeting UK-listed firms, has contributed to demand for sterling.
This resurgence in sterling interest has provided a floor for the currency amid concerns over fiscal expansion—indicating that investors are willing to look past deficits if they see recovery potential elsewhere.
### Bank of England’s Balancing Act
The BoE remains in a delicate position as it navigates the twin threats of persistent inflation and sluggish growth. While inflation has inched lower—a recent reading showed consumer price growth at 2 percent, precisely hitting the bank’s target—the underlying data suggest that price increases in services remain sticky.
Key points in the central bank’s calculus include:
– **Wage growth remains strong** at around 5.8 percent year-over-year, stoking concerns about second-round inflation effects.
– **Money market pricing now projects only two rate cuts** before year-end, compared to three projections earlier in the spring.
– **Real interest rates remain among the highest in the G7**, providing yield support for UK assets and, by extension, for the GBP.
Thus, even as the fiscal burden swells, higher real yields continue to attract foreign buyers.
### Fed Uncertainty Propels Volatility
Parallel to UK-centric developments, the US Federal Reserve’s indecision has played a significant role in stirring volatility and supporting GBP/USD upside. Investors hoping for clarity on US rate cuts were left wanting after the most recent Federal Open Market Committee (FOMC) meeting.
Key drivers from the US include:
– **Fed officials reduced their forecast for rate cuts this year from three to just one** in their latest dot-plot projection.
– **US inflation data showed modest cooling**, but Fed Chair Jerome Powell underscored lingering upside risks
Read more on GBP/USD trading.