When BoE officials openly discuss the impact of the U.S. dollar’s exchange rate on UK inflation, you can’t help but watch GBP/USD. Will the pair manage to restore its upward trend? Let’s discuss it and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Currency exchange rates will be a central topic at the Bank of England’s May meeting.
- Slowing economic growth and inflation allow for a repo rate cut.
- The weakness of the U.S. dollar is structural.
- A breakout above 1.335 will be a reason to buy GBP/USD.
Weekly Fundamental Forecast for Pound Sterling
Rely on the U.S., but don’t drop the ball yourself. Bank of England officials are increasingly discussing the strength of the U.S. dollar, and currency exchange rates are expected to take center stage at the May meeting. The derivatives market expects a 25-basis-point repo rate cut to 4.25%, but GBP/USD isn’t too concerned about the looming monetary expansion. The pair is poised to resume its upward trend. Could anything stand in its way?
Central Bank Rate Dynamics
Source: Bloomberg.
According to Bank of England Governor Andrew Bailey, fears that the U.S. dollar will lose its status as the primary reserve currency are exaggerated. His MPC colleague, Megan Greene, notes that after major shocks, such as the 2008 global financial crisis or the 2020 pandemic, the greenback has always regained lost ground. History has precedents, and they could repeat.
Greene argues that a decline in GBP/USD would likely be inflationary for the UK due to lower import prices. Conversely, a stronger pound could pave the way for deflation, as could China redirecting goods due to its trade war with the U.S.
Economic growth, however, could slow. The UK, as an open economy, is highly sensitive not only to Washington-London relations but also to global events. This makes the IMF’s significant downgrade of the UK’s GDP forecast compared to other European countries logical. On the other hand, the forecasts of +1.1% for 2025 and +1.4% for 2026 are the highest among the G7 countries, excluding the United States and Canada.
The U.S. is pushing the U.K. to lower car import tariffs from 10% to 2.5% and to increase purchases of American agricultural products. The U.K. already applies a flat 10% tariff, which is lower than in other European countries. However, a 90-day deferral and negotiations could change everything.
Speculative Positioning Dynamics for the U.S. Dollar
Source: Bloomberg.
Slowing economic growth and rising deflationary risks allow the derivatives market to predict 2–3 BoE monetary expansion moves in 2025, with the first expected in May. However, this scenario requires further weakening of the U.S. dollar. Judging by speculators’ ongoing increase in short positions on the greenback, this seems likely.
Deutsche Bank presumes GBP/USD could rise to 1.45 by the end of 2027, arguing that the USD index’s weakening is structural. The negative impact of tariffs on the U.S. economy, combined with a reassessment of Washington’s global role, will likely drive the greenback down against major world currencies.
Weekly Trading Plan for GBPUSD
In this environment, it makes sense to hold previously opened and later increased long positions on GBP/USD from 1.327, targeting 1.35 and 1.38. A breakout above resistance at 1.335 will be a reason to open new longs.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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