By Rania Gule, Senior Market Analyst at XS.com – MENA
The GBP/USD pair has continued its upward trajectory for the third consecutive session, recently trading near the 1.3570 level — just shy of its 39-month high at 1.3593. This strong performance of the pound reflects continued market confidence in the British currency, supported by a mix of political and economic factors that have contributed to the dollar’s recent decline. This signals a shift in investor sentiment towards higher-yielding assets in a risk-on environment.
In my view, the dollar’s recent underperformance is not just a short-term technical move, but rather the result of fundamental factors, including eroding market confidence in the U.S. government’s ability to manage its deepening debt crisis. Additionally, President Donald Trump’s recent decision to extend the deadline for imposing tariffs on the European Union until July has helped ease trade tensions, prompting investors to reduce their positions in the U.S. dollar, traditionally seen as a haven.
Despite this, we saw some retracement in GBP/USD late in the U.S. session yesterday, with the pair dipping to 1.3560 as the dollar regained some momentum. However, in my opinion, this pullback is nothing more than natural profit-taking after consecutive gains, especially considering the thin trading volumes due to holidays. The U.S. Dollar Index (DXY) settled near 99.00 after touching its lowest in four weeks, reflecting a technical recovery attempt rather than a fundamental shift in direction.
It’s worth noting that the U.S. monetary policy outlook remains uncertain. While expectations are rising that the Federal Reserve will keep interest rates steady for longer, any surprise in upcoming inflation data or the Fed’s meeting minutes could trigger sharp market movements. On the other hand, I believe the Bank of England has limited room for manoeuvre, especially amid persistent inflationary pressures, reducing the likelihood of near-term rate cuts.
Support for the pound has also been reinforced by recent UK economic data. Retail sales rose by 1.2% in April — the fourth consecutive monthly increase — signaling resilient consumer spending despite economic headwinds. In my analysis, this reflects strong domestic demand and boosts investor confidence in the pound, as the consumer sector remains a key pillar of the UK economy.
Equally important are inflation figures, with the annual rate accelerating to 3.5%, surpassing market expectations, while core inflation climbed to 3.8%. These figures leave the Bank of England in a challenging position, making it harder to justify any move toward monetary easing. From my perspective, sustained inflationary pressure will likely push the central bank to maintain its current stance for longer than previously expected, which could support the pound.
With no major UK economic data scheduled this week, market attention will turn to comments from Bank of England officials, particularly Chief Economist Huw Pill, whose speech could shed light on the bank’s readiness to tackle inflation pressures. These remarks could be pivotal in shaping short-term market expectations.
In contrast, the U.S. calendar is packed with key events. I believe the Federal Reserve’s meeting minutes and the Personal Consumption Expenditures (PCE) index will be crucial in determining the direction of U.S. monetary policy in the near term. If the data falls short of expectations, markets may reassess their bets on further tightening, which could weaken the dollar and push GBP/USD toward higher resistance levels.
Based on all of the above, I believe the bullish trend in GBP/USD remains intact, as long as the pair holds above the key support at 1.3550 and maintains the ascending channel it has respected in recent weeks. A breakout above 1.3593 could pave the way toward 1.3700, especially in the absence of clear signals for monetary tightening from the U.S. side.
In conclusion, the current risk-on sentiment, combined with strong UK data and the ongoing uncertainty surrounding the U.S. economy, supports the continuation of GBP strength, at least in the short term. From both technical and fundamental standpoints, I maintain a bullish outlook on the pair while closely monitoring U.S. developments that could potentially shift the balance of direction going forward.