The British pound dipped on Friday but remained on track for a monthly gain against the U.S. dollar, supported by strong economic data and fading expectations of rate cuts from the Bank of England. growing concerns over the UK’s fiscal outlook weighed on the currency.
Sterling fell 0.3% on the day to $1.3464, and recorded a similar drop against the euro. Still, the pound was up around 2% for the month versus the dollar, though slightly weaker against the euro.
Pressure on the currency came as an influential think tank suggested the UK government could consider taxing banks based on their reserves held at the Bank of England, a move that triggered a sell-off in British banking stocks.
UK bank shares were among the worst performers on the pan-European STOXX 600 index, while benchmark 10-year Gilt yields rose three basis points to 4.73%, reflecting market unease about the country’s fiscal policy.
“All in all, it’s highlighting the potential downside risks for the pound from the government’s fiscal position,” said Lee Hardman, senior currency analyst at MUFG.
Analysts say the pound’s recent strength has been driven by solid UK economic indicators and reduced expectations for near-term interest rate cuts. However, they also warn that fiscal policy will remain a key risk factor.
Markets are closely watching UK finance minister Rachel Reeves, who is expected to raise taxes again after targeting employer contributions in her first budget last year.
Elsewhere, the U.S. dollar was steady against a basket of major currencies at 97.99, as traders awaited the release of the PCE price index and the Federal Reserve’s preferred inflation gauge. Investors currently see an 85% chance of a U.S. interest rate cut next month.
Read also: Naira gains 0.48% against British pound, 0.24% against US dollar at official market
