- The Pound Sterling extends its march north past 1.3500 vs. the US Dollar.
- GBP/USD navigates its fourth consecutive month of gains.
- UK inflation rose more than expected in April, lifting eyebrows at the BoE.
The British Pound held a firm tone throughout the week, pushing GBP/USD beyond the 1.3500 mark on Friday, territory last seen in late February 2022.
Sterling’s advance was driven largely by sustained pressure on the US Dollar (USD), which accelerated in the latter part of the week following President Donald Trump’s threat to impose 50% tariffs on European Union (EU) imports.
Adding to the bullish backdrop, UK 10-year gilt yields climbed to multi-week highs above 4.80% earlier in the week, though they later gave back some of those gains.
Data seems to underpin a BoE pause
Auspicious results from UK fundamentals highlighted the positive momentum the domestic economy appears to have walked into, at the same time prompting the “Old Lady” to maintain a prudent stance when it comes to deciding on future policy rates moves.
On the above, preliminary UK GDP figures surprised to the upside after showing the economy is expected to have expanded 0.7% QoQ in the January-March period, and 1.3% over the last 12 months.
Regarding the UK labour market, despite the jobless rate ticking higher by 0.1% in March, Average Earnings including Bonus, a proxy for inflation, rose more than expected, while the Claimant Count Change rose to just above 5K individuals.
In addition, UK inflation data was a big surprise this week, after the Consumer Price Index (CPI) rose more than initially estimated in April. While headline inflation gained 3.5% from a year earlier, core inflation advanced 3.8% on a yearly basis.
Following the data release, interest rate futures indicated that investors were pricing in roughly 37 basis points of rate cuts by the BoE by the end of 2025.
Tariff relief propped up the British Pound
There were a couple of news stories that have shaken the trade front in the past few weeks. Indeed, the White House announced a trade truce with China while announcing a trade agreement with the United Kingdom (UK).
The newly announced US-UK trade deal saw Britain remove its 20% retaliatory tariff on US beef, starting May 8, 2025, and introduce new tariff-free quotas for American beef and 1.4 billion litres of US ethanol. In return, the US has agreed to allow up to 100K UK-made vehicles to enter the US at a reduced 10% tariff.
The deal also sets the stage for further negotiations on quotas for UK steel and aluminium exports, while discussions will continue on broader issues including rules of origin, pharmaceuticals, digital trade, financial services and agriculture.
MPC does look cautious
So far this week, Chief Economist Huw Pill said that he believed a quarterly pace of interest rate cuts would have been too rapid given the current inflation outlook. However, he suggested that his decision earlier this month to vote for holding rates steady was likely to be just “a skip” rather than a change in direction.
What’s next on the UK docket
A light UK calendar next week should prompt investors to steer away from the domestic calendar and closely follow developments on the trade front as well as US Dollar dynamics.
GBP/USD: Technical landscape
Pablo Piovano, Senior Analyst at FX Street, notes: “If bullish momentum gathers pace, GBP/USD could attempt to revisit the 2025 high at 1.3533 (May 23). Beyond that, Cable may target the February 2022 top at 1.3643 (February 10), ahead of the 2022 peak at 1.3748 (January 13).”
Piovano added that initial support is seen at the May low of 1.3139 (May 12), which appears reinforced by the provisional 55-day SMA at 1.3140. A more substantial retreat could bring the key 200-day SMA at 1.2882 into play.
Momentum indicators seem to suggest that further gains should appear in the pipeline: The Relative Strength Index (RSI) rose past the 64 level, while the Average Directional Index (ADX) at nearly 28 indicates a moderately strong trend, Piovano concludes.
