The US dollar has extended its losing streak since last Thursday, marking its longest decline since June 2025. The drop in Treasury yields to five-week lows has added to the pressure, with the British pound emerging as the primary beneficiary of the dollar’s weakness. Investors are gradually overcoming concerns about the UK’s new budget, while positive economic data has increased the likelihood of aggressive monetary tightening by the Bank of England (BoE).
Bloomberg reports that Chancellor John Healey will not raise capital gains tax. Instead, increased budgetary expenditure will be funded by higher levies on banking income. Some market participants believe that, in a volatile environment, the new Chancellor should avoid drawing attention to Britain, allowing investors to focus on other regions like the US, France, Japan, or the Middle East. A modest and transparent budget would help Britain stay out of the spotlight.
The government’s borrowing in September was £24.5 billion, 7.7% more than a year earlier but slightly above the £23.8 billion expected by economists. A stable political climate, coupled with strong labour market and inflation data, has raised the odds of aggressive monetary tightening by the BoE. Unemployment unexpectedly fell from 4.9% to 4.7% in June, August, while average wage growth accelerated from 3.6% to 3.7%, exceeding forecasts. BoE member Megan Greene noted that the labour market is stronger than the central bank realizes.
With consumer price inflation rising to 3.5%, an 11-month high, a November base rate hike is nearly certain. Investors expect the BoE to raise rates further, with high energy prices feeding into core inflation. In September, core inflation accelerated from 2.6% to 2.8%, and services inflation rose from 3.4% to 3.7%. The futures market has priced in a rise in the base rate to 4.85% over the next 12 months, an increase of 110 basis points. More than four rate hikes are anticipated, outpacing the Federal Reserve’s pace and supporting a GBPUSD rally.