GBP/USD Forecast: Pound Sterling Rises as UK Gilt Yields Hit Five-Week Low

– Written by


David Woodsmith

STORY LINK GBP/USD Forecast: Pound Sterling Rises as UK Gilt Yields Hit Five-Week Low

The Pound to US Dollar (GBP/USD) exchange rate climbed on Thursday as falling UK government borrowing costs provided support for Sterling following Wednesday’s Autumn Budget.

At the time of writing, GBP/USD was trading at around $1.3370, up approximately 0.3% on the day.

The Pound (GBP) strengthened as investors continued to assess Chancellor John Healey’s first Autumn Budget, with the initial reaction in UK bond markets proving relatively encouraging.

Healey’s decision to adhere to the government’s fiscal rules appeared to reassure investors who had been concerned about the possibility of additional borrowing or measures that could undermine confidence in the public finances.

The Chancellor also avoided major policy surprises that might have unsettled gilt markets, helping UK government borrowing costs retreat further.

The benchmark 10-year gilt yield fell to its lowest level in five weeks, easing some of the pressure that elevated debt-servicing costs have placed on the Treasury.

Although falling yields can sometimes reduce a currency’s appeal by narrowing its interest rate advantage, Thursday’s decline appeared to reflect greater confidence in the UK’s fiscal position rather than expectations of looser Bank of England monetary policy.

This distinction helped Sterling benefit from the move, with investors welcoming signs that the Budget had avoided triggering another bout of bond market volatility.

Nevertheless, concerns about the UK’s economic outlook remain. The Office for Budget Responsibility’s downgrade to its 2027 growth forecast continues to raise questions about the strength of the economy over the coming year.

The US Dollar (USD), meanwhile, weakened as improving market sentiment reduced demand for traditional safe-haven currencies.

The ‘Greenback’ had already come under pressure following Wednesday evening’s Federal Reserve interest rate decision.

As widely expected, policymakers left borrowing costs unchanged, but the accompanying guidance prompted markets to modestly reduce expectations of another rate increase in December.

This adjustment weighed on the Dollar, particularly as investors became more willing to move into riskier assets.

Sentiment also improved following reports of renewed diplomatic efforts to ease tensions between the US and Iran.

A letter from US Vice President JD Vance to Iranian security chief Mohsen Rezaei was reportedly ‘received well’ by Tehran, raising hopes that negotiations between Washington and Iran could resume.

The prospect of a diplomatic breakthrough helped ease some of the geopolitical concerns that have supported demand for the safe-haven Dollar in recent months.

Stronger-than-expected US economic data failed to reverse the currency’s decline.

Preliminary figures showed that the American economy expanded at an annualised rate of 3.4% during the third quarter, accelerating from 2.2% in the previous three months.

The reading exceeded forecasts for 3.2% growth, suggesting that the US economy retained considerable momentum despite elevated borrowing costs.

However, the positive figures were insufficient to offset the pressure from improving risk appetite and reduced expectations of further Federal Reserve tightening.

Near-Term GBP/USD Forecast: Can Sterling Extend Recovery towards $1.34?

The Pound to US Dollar exchange rate could remain sensitive to broader market sentiment on Friday, with few major economic releases scheduled in either the UK or US.

A continuation of Thursday’s more positive market mood could favour Sterling, particularly if investors remain encouraged by the reaction to the Autumn Budget.

Further declines in UK gilt yields would also provide some reassurance that Chancellor John Healey’s fiscal plans have avoided unsettling bond investors.

This could help GBP/USD challenge the $1.3400 level, which remains the immediate upside reference point following Thursday’s recovery.

A sustained move above this area would strengthen the case for further Sterling gains.

However, the Dollar could regain ground if geopolitical tensions intensify or global equity markets come under renewed pressure.

Developments in the Middle East will remain particularly important, with any setbacks in diplomatic efforts potentially reviving demand for safe-haven assets.

Investors will also continue assessing the Federal Reserve’s policy outlook following Wednesday’s decision.

Any renewed speculation that US policymakers could raise interest rates in December may provide additional support for the Dollar.

For GBP/USD, a retreat below $1.3350 could weaken the near-term recovery, potentially bringing the $1.3300 level back into focus.

The direction of UK bond yields and broader risk appetite will therefore remain important influences as the pairing approaches the end of the week.

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TAGS: Pound Dollar Forecasts