The British pound has been on a four-day winning streak against the US dollar, briefly touching 1.3430 during Asian trading hours — inching closer to the key 1.3450 level. Investors are reassessing the monetary policy outlooks in the UK and the US, with stronger-than-expected UK inflation data and anticipation around upcoming economic reports acting as twin tailwinds for the pound.
Meanwhile, the dollar continues to face headwinds. Moody’s recently downgraded the outlook on US sovereign credit, stoking concerns over the country’s long-term fiscal health. Their report warns of federal debt climbing to 134% of GDP by 2035, with deficits potentially widening to 9% of GDP. Despite the Fed’s current commitment to maintaining high interest rates, uncertainty around trade policy and weakening consumer and business confidence are prompting doubts about how long tight policy can be sustained. A weaker-than-expected auction for 20-year Treasuries, pushing yields up to 4.43%, reflects mounting market tension over US fiscal stability.
In contrast, UK inflation data came in stronger than predicted. CPI in April rose 3.5% year-over-year, topping forecasts of 3.3%, while core inflation climbed to 3.8% — the highest levels since last November. This has cooled expectations for Bank of England rate cuts this year. Money markets now only see roughly 34 basis points of cuts left for 2024, a sizable pullback from earlier in the year.
Attention now turns to the UK’s upcoming PMI data. If the services or manufacturing sectors show signs of resilience, it could reinforce the BoE’s cautious, potentially hawkish stance. Analysts currently expect April’s services PMI to slip to 49.0 from 52.5 in March, while manufacturing PMI is forecast to edge up slightly to 45.4. Stronger-than-expected readings could push the pound even higher.
Technically, GBP/USD has broken above the consolidation range between 1.33 and 1.34, and is trading above the 200-day moving average (~1.3280). Sustaining momentum above 1.34 will shift focus to resistance levels at 1.3490 and 1.35. A breakout above that range could mark the beginning of a new uptrend for the pound. That said, headwinds remain — manufacturing continues to contract and service sector growth is cooling. Any downside surprise in the data could trigger short-term pullbacks.
Positioning data also offers insight. According to the latest CFTC report (as of May 14), leveraged funds are still net short on the pound, signaling that market sentiment remains cautious. With geopolitical risks and the US presidential election looming large, levels above 1.35 could also trigger profit-taking.
Looking ahead, investors are watching the UK retail sales data due Friday and the US PCE inflation print next week. These releases will be key in recalibrating expectations around economic strength and policy moves on both sides of the Atlantic. If the Fed delays easing and the Bank of England stays cautious, GBP/USD could challenge the 1.36 mark by the end of Q2 — with data and market reaction determining the next move.
