The British Pound slips again as bets on an October Fed hike build

The British Pound has weakened again as investors anticipate a Federal Reserve rate increase in October. The Dollar has been gaining ground against most major currencies, making this a Dollar move rather than a Pound issue. According to CME FedWatch, the probability of a second Fed hike on October 28 stands at 53%, up from around 40% following the September 16 decision.

The UK has a borrowing figure, two surveys, and three speeches scheduled before Friday, but none of them impacts the UK's interest rate. Chicago Fed President Goolsbee suggested that if US inflation stems from excessive demand, high oil prices, and tariffs, the Fed should raise rates more aggressively and sooner. Such comments have increased the likelihood of an October rate hike, strengthening the Dollar against the Pound since September 16.

The Bank of England's main interest rate, known as the Bank Rate, has remained at 3.75% since December 2025, with the next meeting on November 5. A Fed hike on October 28 would make a Dollar deposit earn more than a pound deposit, explaining the shift in the pair's odds. UK public sector borrowing for August is expected on Tuesday morning, with a forecast of £15.7 billion, a significant increase from £1.8 billion in July.

This trend occurs annually due to the second tax instalment payment by self-employed individuals in July. KPMG estimated that Chancellor Healey's margin within the government's borrowing limits has shrunk to about £12 billion from £23.6 billion in the spring forecast, with around £9 billion lost to higher interest costs. Investors concerned about the UK's budget hold fewer Pounds.

The Office for Budget Responsibility (OBR) will determine the government's interest bill for the October 28 Budget from the yields on UK government bonds, averaging over ten working days, and has not specified which ten. The 10-year gilt yield reached its highest level since 2008 on September 1, and any high-yield day within the window could lead to higher taxes or spending cuts, slowing economic growth and making a November BoE rate increase less justifiable.

Early readings of UK Purchasing Managers Index (PMI) surveys are due on Wednesday morning, with manufacturing forecast at 51.4 (up from 51.7) and services at 52 (up from 52.5). A BoE Chief Economist, along with external members Greene and Mann, argued that stronger growth implies spare capacity is no longer expanding. Soft survey results favor the six who voted against an increase, making a November hike less probable and detrimental to the Pound.

BoE Deputy Governor Breeden and external member Dhingra spoke on Thursday, and Deputy Governor Lombardelli on Friday, all of whom maintained their stance on September 17. If any of them suggests a change in their vote, the Pound would gain strength. The minutes from the meeting will be released on Thursday, with external member Dhingra still favoring a wait-and-see approach, while Deputy Governor Breeden indicated an increase becomes more justifiable if wage and price increases materialize.

Deputy Governor Lombardelli suggested the case for an increase becomes stronger as the Middle East war persists without a lasting resolution, a vote considered tentative. The US PMI surveys will be released on Wednesday at 13:45 GMT, with services expected at 56 after 56.5. Durable goods orders are scheduled for Friday at 12:30 GMT, with a forecast of -0.3% after 1.1%.

The University of Michigan survey at 14:00 GMT on Friday is expected to show inflation expectations remaining steady at 4.6%. Positive numbers from any of these surveys increase the odds of an October rate hike, leading to a lower GBP/USD. Speculators held 58.7K more contracts betting against Sterling than favoring it in the latest weekly count from the Commodity Futures Trading Commission (CFTC), with the next count due on Friday at 19:30 GMT.

Any information on Thursday suggesting a higher likelihood of a November increase could prompt some speculators to reduce their bets, buying Pounds instead. The Pound has struggled to stay above 1.3400 in the last three sessions, with the 200-day average just above that level. The next hurdle is 1.3500, the level where the September 16 decline began.

Support can be found at the session low just above 1.3350, followed by the September low just below that, set on September 17 and tested again on September 18. The Pound has not traded below 1.3300 since late July. Currently, the sentiment is bearish while the Pound remains under 1.3450, with 1.3300 as the immediate target and 1.3200 as the secondary objective.

The daily Stochastic Relative Strength Index (Stoch RSI), a momentum indicator, is near 15 and has been flat near the bottom of its range for over a week, indicating that the decline has slowed but not reversed. A daily close above 1.3450 would bring the Pound back above its 200-day average, ending the bearish outlook.