News Maker 23

The pound sterling strengthened during Friday's trading (Oct 9), with the GBP/USD pair rising toward 1.3240 in early Asian trading. This gain 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 needed to bring inflation down to the 2% target, though such moves need not occur at every consecutive meeting.

Expectations regarding Fed policy have begun to shift. Markets now estimate the probability of at least a 25-basis-point rate hike at the October meeting at just 17.7%, down from 38% a week earlier. Meanwhile, the probability of a hike in December stands at around 83%. Diminished expectations for a near-term rate hike have given the pound room to strengthen as pressure on the US dollar 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 rise, as investors closely watch whether budget policies can maintain market confidence in UK finances. If 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.