Pound Reacts with Decline to Rise in Borrowing

[Ben Graham]

The British pound fell following news that the UK government borrowed £7.2 billion more than forecast during the first six months of the financial year — underscoring the challenge facing Chancellor Rachel Reeves as she prepares her upcoming budget plan aimed at restoring public finances.Although this sudden increase in borrowing was not entirely unexpected, it casts doubt on the government's stated goals of stabilizing public debt and reducing the deficit. Economists note that a combination of slowing economic growth and persistently high inflation is creating extremely unfavorable conditions for implementing ambitious fiscal recovery plans. Of particular concern is the prospect of the Bank of England keeping interest rates elevated in order to tame inflation. Higher borrowing costs for the government will further strain public finances and could lead to reduced investment in key sectors of the economy.

Reeves's upcoming budget plan will be closely scrutinized by markets and analysts. The credibility and realism of her plan to restore public finances will largely determine the stability of the British currency and investor confidence in the UK economy. Reeves is expected to propose a series of measures to both increase revenues and cut spending, but achieving a balance between sound fiscal policy and supporting economic growth will be extremely difficult.

According to the report, the budget deficit rose to £99.8 billion, exceeding the Office for Budget Responsibility's (OBR) March forecast of £92.6 billion. In September alone, borrowing reached £20.2 billion — the highest monthly figure since the start of the pandemic. The worsening situation was driven by a sharp rise in interest payments on government debt.

Economists estimate that higher interest rates, a reversal of welfare spending cuts, and an expected productivity downgrade by the Office for Budget Responsibility mean that Reeves will need to find about £35 billion just to rebuild the £9.9 billion reserve she had set aside to achieve her goal of balancing spending and revenues.

The deficit significantly exceeds both OBR forecasts and last year's figures, despite a recent correction announced earlier this month that brought Reeves an additional £2 billion in value-added tax (VAT) revenue. The Office for National Statistics (ONS) explained that this revision stemmed from erroneous VAT data provided by HM Revenue and Customs.

The ONS also noted that the September deficit was the second-highest monthly figure since records began in 1993 and was roughly in line with the OBR's forecast of £20 billion. Economists, on average, had expected a slightly higher figure — £20.8 billion.

As mentioned earlier, the pound reacted with a slight decline to all this news.

As for the current technical outlook for GBP/USD, buyers of the pound need to reclaim the nearest resistance at 1.3405. Only this will allow a push toward 1.3440, above which further progress will be quite difficult. The furthest target is around 1.3485. In the event of a decline, bears will likely attempt to regain control over 1.3370. If they succeed, a breakout below this range would deal a serious blow to bullish positions and push GBP/USD down to 1.3335, with potential to extend toward 1.3295.

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