Sterling falls as UK budget deficit balloons

The British pound slipped to $1.35 on Thursday, marking its weakest level in two weeks after UK public finance data revealed a larger-than-expected deterioration in the government’s fiscal position.

Public sector net borrowing surged to £18 billion in August, the highest reading for the month in five years and well above market expectations of £12.7 billion. Cumulative borrowing for the first five months of the fiscal year climbed to £83.8 billion, overshooting the Office for Budget Responsibility’s March forecast by £11.4 billion. Revisions to prior months also added another £5.9 billion, amplifying concerns about the trajectory of the UK’s public debt.

The worse-than-expected figures come at a delicate moment, with the government preparing for the autumn budget amid intensifying scrutiny of fiscal sustainability.

Global concerns over sovereign debt levels have already driven yields on long-dated UK gilts higher, with 30-year yields recently touching record highs. The data raise questions about the scope for fiscal easing, while simultaneously complicating the Treasury’s financing outlook.

On the monetary policy front, the Bank of England opted to hold its base rate steady at 4% in a 7–2 vote, with two members backing another quarter-point cut. Policymakers also announced a slowdown in quantitative tightening, lowering gilt sales to £70 billion annually, while reiterating a cautious stance given persistent inflationary pressures.

Traders modestly extended their expectations for long-term easing, but markets remain divided over the pace and scale of potential cuts in 2026, particularly in light of stickier-than-expected inflation data earlier this summer.

The currency also faced headwinds from a firmer US dollar, which gained ground after the Federal Reserve delivered a 25-basis-point cut and signaled another 50 basis points of easing before year-end.

However, Chair Jerome Powell emphasized that the latest move should not be interpreted as the beginning of a full easing cycle, framing it instead as a tactical adjustment amid labor market weakness and global uncertainties. The divergence between a cautious BoE and a more proactive Fed has added to volatility in GBP/USD, which remains sensitive to fiscal developments and incoming inflation data in the UK.