As recent market attention shifts toward the economic outlook of the UK and the US, the British pound has seen a notable rally against the US dollar over the past two weeks—driven largely by Moody’s decision in mid-May to revise its outlook on the US credit rating from stable to negative. This move has weighed on the dollar and opened up space for the pound to climb.
Moody’s cited the worsening US budget deficit and mounting debt levels as key reasons for the downgrade, further amplifying concerns over the sustainability of US fiscal policies. In response, the US dollar index dipped, while Treasury yields saw a short-term uptick. However, overall demand for safe-haven assets declined, putting additional pressure on the dollar. At the same time, capital began flowing into markets with relatively stronger fundamentals. The UK, in particular, posted a string of upbeat economic data that made sterling more attractive.
Breaking down the numbers: US inflation data showed cooling pressure, with April’s Consumer Price Index (CPI) rising just 0.2%, and an unexpected 0.5% drop in the Producer Price Index (PPI). However, weak retail growth—up only 0.1%—highlighted sluggish consumer spending and weighed on the dollar. In contrast, the UK painted a more optimistic picture. First-quarter GDP rose 0.7% quarter-on-quarter, signaling an exit from recession territory. Most notably, retail sales surged 6.8% year-on-year, underscoring a revival in domestic demand.
From a technical perspective, GBP/USD has broken above the 1.30 level and is testing resistance around 1.33 and 1.36, suggesting strong bullish momentum. Still, the 1.25 level remains a key support to watch—any pullback may find buying interest at that zone.
Market sentiment remains divided. Some analysts argue that short-term political uncertainty in the US, particularly around budget negotiations in Congress, continues to cloud the dollar’s outlook. If talks stall further, concerns over US credit risk may grow, adding more downward pressure on the greenback.
Looking ahead, investors will be closely watching the next moves from both the Fed and the Bank of England. While the Fed has signaled a wait-and-see stance, continued evidence of easing inflation could bring rate cuts back into focus, potentially weakening the dollar further. In contrast, steady improvements in UK economic data may allow the Bank of England to maintain a more hawkish tone, which could further solidify sterling’s relative strength.
In summary, the pound’s recent rally isn’t just about a weakening dollar—it’s also a reflection of improving UK fundamentals and diverging policy expectations between central banks. In the near term, investors should monitor developments in US politics and data releases, while watching whether sterling has enough momentum to break through key resistance levels.
