The pound sterling strengthened during Friday's trading (October 9), with the GBP/USD pair rising toward 1.3240 in early Asian trading. This appreciation followed comments from Federal Reserve Governor Christopher Waller that exerted some downward pressure on the US dollar. Waller stated that further interest rate hikes would likely be necessary to bring inflation down to the 2% target, though such moves did not necessarily need to occur at consecutive meetings.
Expectations regarding Federal Reserve policy have begun to shift. The market now estimates only a 17.7% probability of an interest rate hike of at least 25 basis points at the October meeting, down from 38% the previous week. Meanwhile, the probability of a hike in December stands at approximately 83%. Diminished expectations for a near-term rate hike have provided room for the pound to strengthen as pressure on the US dollar has eased slightly.
However, the pound's gains face challenges stemming from the UK's fiscal situation. UK long-term borrowing costs recently hit their highest levels since the 1990s, heightening investor scrutiny regarding the government's ability to manage the nation's finances. Market attention is now focused on the government budget due on October 28, particularly regarding plans to manage the deficit and potential changes to tax policy.
This fiscal uncertainty could limit the GBP/USD pair's upside, as investors closely monitor whether the budget policies can maintain market confidence in UK finances. Should fiscal risks escalate and UK bond yields surge again due to debt concerns, renewed pressure on the pound could emerge. Conversely, fiscal policies perceived as credible could help stabilize the bond market while providing support for the British currency.