Pound Edges Up as Soft Dollar Balanced by UK Budget Risks

Key Moments

GBP/USD Supported by Softer Dollar After Waller Remarks

The British Pound advanced against the US Dollar, with GBP/USD gaining traction toward 1.3240 during early Asian trade on Friday. The move came as the Dollar weakened following comments from Federal Reserve Governor Christopher Waller, while market participants looked ahead to the release of the Michigan Consumer Sentiment Index for October later in the day.

On Thursday, Waller stated that further interest rate increases will likely be required to bring inflation back to the Fed’s 2% objective, but noted there was “flexibility” in the pace of tightening and left open the possibility of a pause at the upcoming October policy meeting.

Pricing reflected a more cautious outlook on near-term tightening. Data from the CME FedWatch tool showed investors assigning a 17.7% probability that the Federal Reserve will raise rates by at least 25 basis points at its meeting later this month, down from 38% a week earlier. Markets, however, were still assigning an 83% chance of a hike at the Fed’s December gathering.

UK Fiscal Backdrop Clouds Pound Outlook

Despite the modest rebound in GBP/USD, the UK’s fiscal situation remained a key headwind for the Pound. The country’s long-term borrowing costs reached their highest levels since the 1990s last week, keeping attention firmly on Finance Minister John Healey’s first budget scheduled for October 28.

Earlier in the week, the UK chancellor described a “challenging fiscal picture” for the country’s largest lenders but did not indicate whether banks could face higher taxes in the upcoming budget. The lack of clarity on potential fiscal measures has weighed on sentiment toward the Pound, even as short-term price action showed some stabilization.

UOB Sees Range-Bound Trading Despite Recent GBP Setback

Analysts at UOB Group reported that their earlier constructive bias on the Pound was quickly reversed by recent market movements. They noted that on October 7, with GBP/USD trading at 1.3265, they had pointed to “a slight increase in upward momentum, and GBP may edge higher toward 1.3315.” That scenario was “invalidated quickly as GBP fell below our ‘strong support’ at 1.3200 with a low of 1.3194.”

In a revised 1-3 week outlook, UOB highlighted that “there has been a slight increase in downward momentum, but it is insufficient to indicate a sustained decline.” They now expect GBP to “edge lower, but any decline is likely to be part of a lower range of 1.3140/1.3280.” According to their view, “GBP is unlikely to break clearly below 1.3140,” underscoring a broadly range-bound bias for the currency pair despite the latest pullback.

Hawkish Musalem Reinforces Higher-for-Longer Fed Narrative

Comments from another Federal Reserve official, Musalem, also drew attention for their hawkish tone. Musalem delivered a message that remained firmly in favor of additional policy tightening, earning a 7.3/10 score on the FXS Speechtracker, roughly aligned with the 7.2/10 historical average and suggesting continuity rather than a change in stance.

Musalem emphasized that “more monetary policy firming will be required” to return inflation to 2% while characterizing the economy and labor market as “pretty strong” and “balanced.” This perspective backed expectations for further rate hikes rather than cuts, even as Musalem underlined the importance of keeping an open mind going into policy meetings.

The comments also touched on persistent demand pressures, anchored market inflation expectations, and structurally higher real yields linked to AI investment and fiscal deficits. Together, these factors point toward a higher-for-longer rate environment that is seen as broadly supportive of the Dollar and likely to keep risk assets sensitive to shifts in policy expectations.

The FXS Fed Sentiment Index slipped by 0.25 points to 138.33, signaling a modest reduction in perceived hawkishness but still lying well above the neutral 100 threshold. This setup – a slightly lower reading yet elevated level – indicates that while the surprise element relative to prior Fed communication has eased somewhat, the policy backdrop remains clearly restrictive. This is consistent with Musalem’s call for further firming and the steady tone reflected in the FXS Speechtracker.

Technical Picture: GBP/USD Still Bearish Below 100-Day SMA

From a technical standpoint, GBP/USD retains a bearish short-term profile on the daily chart. The pair trades beneath the 20-day simple moving average from the Bollinger Bands and remains well below the 100-day simple moving average, reinforcing a negative bias. Price action is capped by the upper Bollinger band, signaling limited upside momentum.

The 14-period Relative Strength Index stands at 39, indicating mildly bearish momentum without slipping into oversold conditions. This suggests that sellers remain in control but have not yet demonstrated strong conviction for a more aggressive downside move.

On the upside, initial resistance is located near 1.3295 at the Bollinger middle band SMA, followed by the 100-day SMA at 1.3402 and then the upper Bollinger band at 1.3470. On the downside, the lower Bollinger band at 1.3115 represents the next significant support level. A firm break below this area would signal scope for a deeper decline in GBP/USD.