May 21, 2025 – Written by David Woodsmith
STORY LINK Pound to Dollar Forecast: GBP Gains on USD Weakness, UK Inflation
A combination of U.S. Dollar weakness and stronger than expected UK inflation triggered a surge in the Pound to Dollar (GBP/USD) exchange rate to 3-year highs just below 1.3470.
The pair, however, was unable to hold the gains and retreated to 1.3410 as the Pound dipped and the dollar recovered from Asian lows.
A sustained break above 1.3445/50 remains key to generating further medium-term gains.
According to UoB; “based on the current momentum, any advance might find the late April high of 1.3445 difficult to break.”
Markets now consider that a June Bank of England rate cut is very unlikely, but the longer-term debate is continuing to rage amid the debate over underlying inflation.
According to the ONS, the headline year-on-year inflation rate posting a stronger than expected surge to 3.5% from 2.6% previously and above consensus forecasts of 3.3%.
The core rate increased to 3.8% from 3.4% and above market expectations of 3.6%.
A key element was the increase in retail energy prices. There was also upward pressure from transport, recreation and culture which was offset by some weakness in clothing and footwear.
The goods inflation rate increased to 1.7% from 0.6% while the services-sector rate jumped to 5.4% from 4.7%.
Following the data, markets were less confident that there would be two further rate cuts this year, but views were mixed.
Luke Bartholomew, deputy chief economist at the fund manager Aberdeen; “we think a quarterly profile of rate cuts remains appropriate, but the chance of the easing cycle speeding up any time soon has fallen.
Goldman Sachs economist James Moberly sees a June cut as being off the agenda, but does not expect further increases in inflation and added; “in fact, we see services inflation falling back below the BoE’s projections later in the year.”
He added; “Given the restrictive policy stance, notable labour market loosening, a likely deceleration in pay growth, and a softer near-term demand outlook, we therefore continue to expect the Bank to accelerate the pace of cuts in the second half.”
In contrast, Berenberg considers that the BoE might not be able to cut rates again this year if services inflation increases further; “That would be evidence that demand is solid enough for companies to pass on increases in their costs, and force the Bank of England to take an extended pause in their cutting cycle until services inflation is on a downward path again.”
The dollar index retreated to 2-week lows before a tentative recovery.
Danske Bank commented; “This seems reflective of the fiscal jitters related to last week’s downgrade from Moody’s and the overly accommodative tax bill now being discussed in Congress.”
ING commented; “Periods of data silence often serve as a useful gauge of the market’s underlying bias in FX. So far this week, the tendency to add to USD short positions has been clear.”
There will be a series of G7 meetings in Canada over the next few days with speculation that the US will push for other countries to strengthen their currencies as part of any trade deals.
ING added; “If current speculation proves accurate – and the US is pushing for stronger trading partner currencies – it could not only prompt sharp appreciation in those currencies but also weigh on the dollar more broadly.”
MUFG added; “any sign of pushing trading partners in Asia (Japan this week) to conducting less or stopping US dollar buying intervention would likely trigger further big moves weaker for the dollar.”
If there are no hints over a preference for a weaker US currency, there could be scope for the dollar to recover ground.
Like this piece? Please share with your friends and colleagues:
International Money Transfer? Ask our resident FX expert a money transfer question or try John’s new, free, no-obligation personal service! ,where he helps every step of the way,
ensuring you get the best exchange rates on your currency requirements.
TAGS: Pound Dollar Forecasts
