May 21, 2025 – Written by David Woodsmith
STORY LINK GBP/USD Forecast: Pound Finds Fleeting Gains vs Dollar as UK Inflation Soars
The Pound to US Dollar (GBP/USD) exchange rate struck its strongest level since early 2022 on Wednesday, following the publication of hotter-than-anticipated UK inflation data.
At the time of writing, GBP/USD was trading at approximately $1.3405, Virtually unchanged from Wednesday’s opening levels, but down from a high of $1.3469 briefly struck earlier in the session.
The Pound (GBP) initially jumped on Wednesday morning after the UK’s latest consumer price index revealed inflationary pressures were building more rapidly than forecast.
Figures from the Office for National Statistics (ONS) showed headline inflation climbing to 3.5% in April, a notable jump from the previous reading of 2.6% and higher than the expected 3.3%. Core inflation also surprised to the upside, accelerating from 3.4% to 3.8%.
The initial reaction saw GBP surge across the board as investors speculated that sticky inflation could push the Bank of England (BoE) to adopt a more cautious approach on monetary easing. With rate cut bets being pared back, markets quickly priced in a longer period of elevated interest rates.
However, the Pound’s rally didn’t last. As markets analysed the underlying details, it became clear that much of the inflation increase was driven by volatile components, such sharp rise in road tax and increased air fares over the Easter period.
As a result, economists argued that the data was unlikely to alter the BoE’s overall outlook, with most analysts still expecting the central bank to deliver at least two rate cuts later in the year.
The US Dollar remained on the defensive midweek, unable to recover from the recent wave of selling triggered by deteriorating confidence in the US economy.
Concerns about government borrowing and economic slowdown have been growing, particularly after Moody’s decision to cut the US’s credit rating. The move cast a shadow over the long-term sustainability of US fiscal policy and sparked a fresh rise in Treasury yields.
In addition to debt concerns, trade policy uncertainty and mixed economic indicators have made it difficult for the USD to find firm footing. While hopes for a near-term rate cut from the Federal Reserve have cooled, with analysts fearing this will place even more pressure on the US economy in the coming months.
Looking ahead, the UK’s latest PMI releases are likely to shape the direction of the Pound US Dollar exchange rate on Thursday.
Forecasts suggest continued weakness in the UK’s manufacturing sector may offset gains in services, keeping the private sector’s recovery uneven. If the composite PMI slips further, it could reinforce expectations for BoE rate cuts and weigh on the Pound.
Over in the US, S&P’s latest PMI figures are also due. While not as closely watched as the ISM data, they could still influence USD sentiment. A weaker-than-expected reading may deepen concerns over the health of the US economy and extend downside pressure on the Dollar.
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TAGS: Pound Dollar Forecasts
