The GBPUSD rally was driven by the US dollar’s weakness and an underestimation of the UK economy. Will the pound regain its position above 1.3, or will the recent tariffs implemented by the US administration hinder its progress? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England will keep the repo rate at 4.5%.
- Investors do not believe that Trump’s policy will boost US GDP.
- The scope of monetary expansion in the UK is lower than in the US.
- Short trades can be considered if the GBPUSD pair drops below 1.295.
Weekly Fundamental Forecast for Pound Sterling
It takes two to tango, as they say. The GBPUSD pair has touched 1.3 for the first time since the US presidential election, and its 7% rally from January lows was driven by two factors: investors’ growing frustration with Donald Trump’s policies and robust data on the UK economy. As the Bank of England meeting approaches, the British currency shows solid performance, firmly standing on both feet. However, its overconfidence may be short-lived.
Since the inauguration of the 47th President of the United States, the market’s view of his policies has changed dramatically. Investors no longer believe they will boost the economy. On the contrary, the tariffs will slow GDP, increase the risk of recession, and deprive the US dollar of a trump card such as American exceptionalism. These changes led to a sell-off not only in the greenback but also in US stock indices. According to Bank of America, the main beneficiaries were Europe and the UK.
If we add to this the largest yield differential between 10-year UK Gilts and US Treasuries from the end of 2023, the whole picture becomes as clear as day. UK assets become more attractive, which stimulates the flow of capital from the UK to Europe, boosting GBPUSD quotes.
UK Inflation Rate
Source: Bloomberg.
If the Fed is signaling problems in the disinflationary process due to tariffs, given the slowdown in PCE in February, what can we say about the Bank of England? UK inflation has accelerated, forcing the UK regulator to keep the repo rate at 4.5% in March. Seven MPC members are expected to vote for this outcome, while the remaining two want to loosen monetary policy. The derivatives market estimates the size of the Fed’s monetary expansion at 60bps in 2025 and the Bank of England’s at just over 50bps.
BoE Rate Cut Expectations
Source: Bloomberg.
While investors in the United States are concerned about a looming recession, the UK has no such fears. The impact of a trade war with the US is less significant for the UK than it is for the EU due to a minor imbalance in foreign trade. As a result, the OECD revised its growth estimate for UK GDP in 2025 downward by 0.3%, equivalent to that of the eurozone, which appears somewhat exaggerated.
The UK economy unexpectedly contracted by 0.1% in January, but its significant expansion of 0.4% in December casts doubt on the Bank of England’s pessimistic 0.1% first-quarter forecast. This underestimation of expectations is a reason for investors to unleash their wallets.
However, the moderate optimism may be tempered as April 2 approaches. This day is significant as it coincides with the day Donald Trump referred to as the “liberation of America,” which some have interpreted as “tariffs are coming.” The scale of these tariffs could potentially revive investor interest in the US dollar.
Weekly GBPUSD Trading Plan
The Bank of England’s hawkish rhetoric is unlikely to support the GBPUSD pair. If the pair fails to maintain its footing above 1.295, traders will likely lock in profits on their long positions and open short trades.
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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