Interest rate cuts but not soft: the US dollar rises for three consecutive days, and the British pound "falls back to reality"
2025-09-19 20:47:05
On Friday (September 19), the British pound (GBP) continued its sharp decline against the US dollar, hitting a pre-market low of around 1.3460. The yield on 30-year UK gilts jumped over 1%, approaching 5.50%. Combined with US data and Federal Reserve communications signaling "orderly easing and a robust economy," the British pound led the decline among major currencies. The exchange rate retreated from its high of around 1.3726, approaching the lower limit of its previous range. In the short term, the market is entering a period of bearish sentiment, driven by a combination of bearish fundamentals and weakening technicals.
UK: Fiscal constraints are further magnified
In August, the UK public sector's net borrowing reached £18 billion, the highest in nearly five years and significantly higher than the market expectation of £12.8 billion. The widening fiscal deficit has also led to a passive upward trend in medium- and long-term interest rates, with the yield on 30-year gilts approaching 5.50%. Rapidly rising yields typically suppress the exchange rate through three channels: financing costs, growth expectations, and currency risk premiums, negatively impacting the pound's valuation in the medium to long term. Markets are beginning to price in spending cuts, tax increases, or both, in the autumn budget, which will further constrain growth and consumption.
UK monetary policy: nominal easing pace slows down
The Bank of England announced a £70 billion quantitative tightening program from October 2025 to September 2026, slower than the £100 billion it had unwound over the previous 12 months. The policy rate remained unchanged at 4% by a 7-2 vote, continuing its "gradual yet cautious" easing strategy. The Bank of England also noted that inflationary pressures peaked around 4% around September. While the slower pace will help stabilize financial conditions, the pound's interest rate advantage remains unchanged given the sticky combination of fiscal and inflationary factors.
US: Growth resilience coexists with marginal cooling of labor force
US retail sales rose 0.5% month-over-month in August (0.4% expected) and 0.7% year-over-year (0.6% expected). July's data was revised down from 1.1% to 0.8%. Non-store retail sales and demand for clothing and footwear remained robust. During the same period, initial jobless claims totaled 231,000 (240,000 expected, up from 264,000 in the previous month), indicating that the labor market, while cooling, has not stalled.
The Federal Reserve lowered interest rates by 25 basis points this week to a range of 4.00%-4.25%, its first adjustment of the year, while also hinting at two more rate cuts this year. Powell stated that the "balance of risks has shifted," but stopped short of signaling an urgent easing policy. The US dollar index rose for three consecutive days, trading above 97.50. The dollar's temporary stabilization is exerting external pressure on the British pound.
Short-term catalyst <br/>Mary Daly, President of the San Francisco Fed, will speak early Saturday morning. The market will track her statement on the pace of subsequent rate cuts. If the wording still emphasizes "data dependence + gradualism", the dollar may continue to be strong and it will be difficult for the pound to attract capital inflows.
From the daily chart: Bollinger Band upper track 1.3636/middle track 1.3512/lower track 1.3387, the exchange rate has now fallen below the middle track and moved closer to the lower track, indicating that the process of mean reversion to downward deviation is unfolding; the previous high of 1.3788 and 1.3726 form a double resistance area above, passively establishing the recent downward trend line oblique pressure.
On the MACD, both the DIFF and DEA are converging near 0.0026, with the histogram approximately at 0.0000. This convergence of momentum suggests the previous rebound has weakened and is more susceptible to a subsequent amplified pullback in response to bad news. The RSI is at 46.4775, below 50 but well below the oversold 30 level. This is a typical "weak oscillation - not extreme" pattern: The market has not yet exhausted its potential, but time is still needed to confirm its direction.
From a structural perspective, the 1.3512 middle band has transformed from dynamic support to resistance. Below, the primary support level is 1.3387 (the lower Bollinger band). If this level breaks, a retest of the 1.3140 low is possible. On the upside, 1.3512 represents a short-term bullish-bearish watershed. A break above and stabilization above it could re-initiate mean reversion to the upside. Higher resistance lies at 1.3636 and the 1.3726-1.3788 congested area.
The jump in duration interest rates caused by the fiscal data triggered a repricing of the risk premium of the pound, and the risk budget of funds for pound assets shrank rapidly; at the same time, the US dollar stabilized under the narrative of "lowering interest rates but not in a hurry", resulting in a reversal of its relative attractiveness to non-US currencies.
Short-term (several days to a week)
Bearish scenario: If the US dollar index remains above 97.50 and Daly's speech does not release stronger easing signals, and the UK political-fiscal agenda continues to revolve around the narrative of tight constraints on spending/taxation, the pound may slowly fall along the lower Bollinger band, and the 1.3387 line will face a test of volume; if it falls below and the volume increases, the 1.3248-1.3140 range may enter a retracement.
Bullish scenario: If the US data declines marginally or the Fed releases an unexpectedly dovish tone of "faster pace", the US dollar will fall temporarily. If there are signs of fiscal improvement or faster decline in inflation in the UK, the pound may return to above 1.3512 for a technical rebound, and then launch a compensatory pullback to 1.3636.
Key observation: The gains and losses around 1.3512 and the closing pattern (whether it retraces above the middle line) will determine whether there will be sideways consolidation or further decline.
Fundamentals
UK: Fiscal constraints are further magnified
In August, the UK public sector's net borrowing reached £18 billion, the highest in nearly five years and significantly higher than the market expectation of £12.8 billion. The widening fiscal deficit has also led to a passive upward trend in medium- and long-term interest rates, with the yield on 30-year gilts approaching 5.50%. Rapidly rising yields typically suppress the exchange rate through three channels: financing costs, growth expectations, and currency risk premiums, negatively impacting the pound's valuation in the medium to long term. Markets are beginning to price in spending cuts, tax increases, or both, in the autumn budget, which will further constrain growth and consumption.
UK monetary policy: nominal easing pace slows down
The Bank of England announced a £70 billion quantitative tightening program from October 2025 to September 2026, slower than the £100 billion it had unwound over the previous 12 months. The policy rate remained unchanged at 4% by a 7-2 vote, continuing its "gradual yet cautious" easing strategy. The Bank of England also noted that inflationary pressures peaked around 4% around September. While the slower pace will help stabilize financial conditions, the pound's interest rate advantage remains unchanged given the sticky combination of fiscal and inflationary factors.
US: Growth resilience coexists with marginal cooling of labor force
US retail sales rose 0.5% month-over-month in August (0.4% expected) and 0.7% year-over-year (0.6% expected). July's data was revised down from 1.1% to 0.8%. Non-store retail sales and demand for clothing and footwear remained robust. During the same period, initial jobless claims totaled 231,000 (240,000 expected, up from 264,000 in the previous month), indicating that the labor market, while cooling, has not stalled.
The Federal Reserve lowered interest rates by 25 basis points this week to a range of 4.00%-4.25%, its first adjustment of the year, while also hinting at two more rate cuts this year. Powell stated that the "balance of risks has shifted," but stopped short of signaling an urgent easing policy. The US dollar index rose for three consecutive days, trading above 97.50. The dollar's temporary stabilization is exerting external pressure on the British pound.
Short-term catalyst <br/>Mary Daly, President of the San Francisco Fed, will speak early Saturday morning. The market will track her statement on the pace of subsequent rate cuts. If the wording still emphasizes "data dependence + gradualism", the dollar may continue to be strong and it will be difficult for the pound to attract capital inflows.
Technical aspects:
From the daily chart: Bollinger Band upper track 1.3636/middle track 1.3512/lower track 1.3387, the exchange rate has now fallen below the middle track and moved closer to the lower track, indicating that the process of mean reversion to downward deviation is unfolding; the previous high of 1.3788 and 1.3726 form a double resistance area above, passively establishing the recent downward trend line oblique pressure.
On the MACD, both the DIFF and DEA are converging near 0.0026, with the histogram approximately at 0.0000. This convergence of momentum suggests the previous rebound has weakened and is more susceptible to a subsequent amplified pullback in response to bad news. The RSI is at 46.4775, below 50 but well below the oversold 30 level. This is a typical "weak oscillation - not extreme" pattern: The market has not yet exhausted its potential, but time is still needed to confirm its direction.
From a structural perspective, the 1.3512 middle band has transformed from dynamic support to resistance. Below, the primary support level is 1.3387 (the lower Bollinger band). If this level breaks, a retest of the 1.3140 low is possible. On the upside, 1.3512 represents a short-term bullish-bearish watershed. A break above and stabilization above it could re-initiate mean reversion to the upside. Higher resistance lies at 1.3636 and the 1.3726-1.3788 congested area.
Market Sentiment Observation
The jump in duration interest rates caused by the fiscal data triggered a repricing of the risk premium of the pound, and the risk budget of funds for pound assets shrank rapidly; at the same time, the US dollar stabilized under the narrative of "lowering interest rates but not in a hurry", resulting in a reversal of its relative attractiveness to non-US currencies.
Market Outlook
Short-term (several days to a week)
Bearish scenario: If the US dollar index remains above 97.50 and Daly's speech does not release stronger easing signals, and the UK political-fiscal agenda continues to revolve around the narrative of tight constraints on spending/taxation, the pound may slowly fall along the lower Bollinger band, and the 1.3387 line will face a test of volume; if it falls below and the volume increases, the 1.3248-1.3140 range may enter a retracement.
Bullish scenario: If the US data declines marginally or the Fed releases an unexpectedly dovish tone of "faster pace", the US dollar will fall temporarily. If there are signs of fiscal improvement or faster decline in inflation in the UK, the pound may return to above 1.3512 for a technical rebound, and then launch a compensatory pullback to 1.3636.
Key observation: The gains and losses around 1.3512 and the closing pattern (whether it retraces above the middle line) will determine whether there will be sideways consolidation or further decline.
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