The forex market is currently focusing on the debt issues faced by G10 countries. France, in particular, is under pressure due to its budget problems, but the UK also faces challenges with its upcoming budget announcement. Meanwhile, the US Congressional Budget Office has forecasted a deficit of $1.8 trillion for this year, which has sparked concerns about fiscal health.

Impact of Public Debt on Exchange Rates

Public debt in G10 countries is attracting more attention, affecting exchange rates. In the past, there was a clear connection between spending and economic growth — nations that spent more during the pandemic saw better growth. This relationship influences currencies, prompting central banks to focus on inflation and monetary policies, which can support a stronger currency. However, deficits are still high, and spending doesn’t always lead to growth. In the US, even with large deficits, the economy is showing signs of weakness, impacting the Federal Reserve’s monetary policies. Market stability is crucial, and ongoing fiscal debates among Western governments are likely to remain in the spotlight. Concerns about the UK’s upcoming budget reflect similar worries around fiscal health in G10 countries. Recently, the market’s attention has turned significantly to the sustainability of government debt. The previous belief that increased spending guarantees strong growth is being challenged. For instance, the CBO’s latest report predicts a US deficit of $1.95 trillion for fiscal year 2025, but data shows Q3 GDP growth has slowed to only 0.8%. This shift affects the US dollar and the Federal Reserve’s approach. With the economy weakening amid high deficits, the Fed might find it difficult to keep a tight monetary policy. The futures market is already indicating a 60% chance of a rate cut by the end of Q1 2026, which could further pressure the dollar.

Fiscal Anxiety in the United Kingdom

Similarly, the UK is experiencing fiscal anxiety ahead of its budget announcement at the end of November. This uncertainty is evident in the options market, where one-month implied volatility for GBP/USD has risen above 12%. This situation reminds traders of the volatility seen in 2022, suggesting they should brace for significant price fluctuations. The UK’s challenges are not isolated; France is also facing political issues over its budget, leading to increased market unease. The gap between French and German 10-year government bonds has widened to 85 basis points, indicating rising risk perception. This overall fiscal strain across major European economies could weaken the euro. For traders dealing in derivatives, the key takeaway is that fiscal policy has become a major factor driving currency volatility. Strategies that succeeded when central banks were the main focus might not be as effective now. The era of betting on low volatility appears to be ending, so it may be wise to consider options that thrive during price fluctuations, such as long volatility positions on the pound or dollar. Create your live VT Markets account and start trading now.

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