The pound falls in response to new data

[Ben Graham]

The British pound resumed its decline after news that the UK government's borrowing in August exceeded forecasts, dealing a blow to Chancellor of the Exchequer Rachel Reeves ahead of a challenging autumn budget. Even strong retail sales data, which came in better than economists' expectations, failed to provide support.

According to data released by the Office for National Statistics on Friday, the deficit amounted to 18 billion pounds sterling, well above the Office for Budget Responsibility's forecast of 12.5 billion pounds, marking the largest monthly borrowing in the past five years.

This unexpected increase in borrowing has added fuel to an already difficult economic situation, overshadowed by rising inflation and slowing growth. Markets reacted instantly, voicing concerns over the sustainability of the UK's public finances. The pound lost part of its earlier gains, signaling a decline in investor confidence in the outlook for the British economy. Further increases in borrowing could lead to a downgrade of the UK's credit rating, which in turn would make it harder to attract investment and increase the cost of servicing government debt.

Rachel Reeves now faces the difficult task of designing a budget that can stimulate economic growth without worsening the debt burden. She will need to balance the need for investment in infrastructure and social programs with demands for austerity to stabilize public finances. The budget, due this autumn, will be a key test for the UK government. Its outcome will determine not only the country's economic policy for the coming years but also the future of the pound, which will react sharply to every announcement and every change in government plans.

At the end of the first five months of the fiscal year, the budget deficit stood at 83.8 billion pounds, 11.4 billion pounds above the OBR forecast and 67.6 billion pounds higher than a year earlier. The deterioration was driven by rising spending on public services, social benefits, and debt interest, as well as unfavorable revisions.

Higher debt servicing costs, a series of abrupt policy shifts, and the expected downgrade in productivity assessments by the Office for Budget Responsibility are projected to breach the Chancellor's own fiscal rules, which require that revenues cover current expenditures by the 2029–30 fiscal year.

As noted above, UK retail sales in August rose more strongly than expected. The volume of goods sold online and in stores increased by 0.5%, matching July's revised figure of 0.5%, the Office for National Statistics reported on Friday. Warm weather boosted clothing and bakery sales, offsetting declines in computer and telecommunications equipment stores. Economists had expected growth of 0.4%. The report confirms that consumers ignored warnings about job cuts, slowing wage growth, and rising prices over the summer, much of which stemmed from Labour's 26-billion-pound wage spending increase. Clearly, stronger retail sales will now provide some relief to Chancellor of the Exchequer Rachel Reeves.

As for the current GBP/USD technical picture, pound buyers need to reclaim the nearest resistance at 1.3570. Only this will allow targeting 1.3620, a level that will be difficult to break through. The most distant target will be the 1.3655 level. In case of a decline, bears will attempt to retake control of 1.3495. If successful, a breakout of this range will deliver a serious blow to bullish positions and push GBP/USD down to a low of 1.3455, with the prospect of extending toward 1.3420.

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