UK Deficit Surprise Undermines Sterling's Post-Policy Gains
The British pound lost momentum after an initial post-policy rally, as mounting concerns over the United Kingdom's fiscal position re-emerged as a key headwind for the currency.
Sterling posted strong gains last Thursday following the Bank of England's policy announcement. The GBP/USD pair climbed more than 1.3%, briefly breaking above the 1.3450 level, while EUR/GBP slipped close to its lowest point of the year.
However, the positive momentum quickly faded. The release of UK government debt on Friday triggered renewed selling pressure on the pound. By the Asian trading session on Monday, March 23, GBP/USD remained subdued, hovering around the 1.3320 area.
The Office for National Statistics (ONS) reported that the UK government recorded a deficit of £14.3 billion in February 2026, a sharp reversal from the £30.4 billion surplus posted in January. The deficit also significantly exceeded market expectations of £8.8 billion, underscoring growing fiscal strain.
Debt servicing costs are rising rapidly, further highlighting the pressure on public finances. Interest payments on government debt reached £13 billion in February 2026, surging from £5.5 billion in the same period a year earlier. The increase coincides with a sharp rise in 10-year government bond yields, which have climbed to their highest level in 18 years—levels not seen since the global financial crisis in 2008.
The ONS also estimated that the United Kingdom's debt-to-GDP ratio reached 93.1% at the end of February 2026, approaching its peak since the early 1960s.
Fiscal pressure could intensify further as global energy prices continue to climb amid the ongoing conflict in the Middle East. Higher oil and gas costs are expected to weigh on both households and businesses, while the government's capacity to provide subsidies is seen as limited given the widening deficit.
Ruth Gregory, deputy chief UK economist at Capital Economics, assessed that the government's fiscal space is currently very tight. She expressed skepticism that authorities would be able to deploy a large-scale stimulus package similar to the measures introduced in 2022, even if geopolitical tensions continue to escalate.