GBP/USD has fallen for the fourth day in a row, trading around 1.3380 during Asian hours on Wednesday. This decline comes as the UK prepares to release its Consumer Price Index (CPI) and Retail Price Index data for September. The Pound has weakened because UK borrowing exceeded estimates by £7.2 billion in the first half of the fiscal year, leading to a budget deficit of £99.8 billion, higher than the Office for Budget Responsibility’s (OBR) prediction of £92.6 billion. In September, debt interest payments jumped 66% to £9.7 billion, marking a record for that month. GBP/USD slipped below 1.3400 as traders adopted a cautious stance ahead of upcoming UK CPI data on Wednesday and US CPI data on Friday. The UK’s headline CPI inflation is expected to rise to 4.0% year-on-year, with core CPI anticipated at 3.7%.

Bank Of England Dilemma

The Bank of England is facing challenges in managing UK inflation amidst a recessionary outlook. On Tuesday, GBP/USD dropped over 0.17% as the US Dollar strengthened, causing traders to be wary ahead of the US CPI release on Friday. Additionally, UK Public Sector Net Borrowing for September was £20.24 billion, just below the forecast of £20.5 billion. Currently, GBP/USD is struggling, trading around 1.3380, as the market remains cautious. Traders are particularly focused on the upcoming UK Consumer Price Index (CPI) data, which will be crucial in determining the future direction of the Pound Sterling. The Pound is under extra pressure due to the UK’s fiscal situation, with government borrowing exceeding forecasts by £7.2 billion in the first half of the year. This issue is not new; similar concerns were present in 2023 and 2024 when public sector net borrowing was consistently high, reaching £119.1 billion in the financial year ending December 2023. The ongoing trend of high debt servicing costs, which hit a record for September, limits the government’s options and impacts the currency negatively.

Market Strategies And US Dollar Influence

Traders should brace for volatility, as the Bank of England has limited options. With headline inflation expected around 4.0%—similar to the rates seen in late 2023—the BoE is in a tight spot. We recall that the Bank maintained rates at 5.25% for an extended period due to stagflationary pressures—high inflation combined with a weak economy. Given the negative sentiment and uncertainty, traders are likely preparing for further declines or at least significant price fluctuations. Purchasing GBP/USD put options could be a wise strategy to protect against a drop below key support levels, especially if CPI data confirms ongoing inflation without provoking a strong response from the BoE. Another strategy is selling out-of-the-money call options for those expecting the pair’s upside to be limited near the 1.3400 level. The challenges facing the Pound are not solely domestic as the US Dollar is also bouncing back. The US Dollar Index (DXY) recently reached a three-day high, adding pressure on the GBP/USD pair. Attention will also be directed toward US CPI figures due later this week, as strong inflation data from the US could further bolster the dollar’s recovery. Create your live VT Markets account and start trading now.

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