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GBPUSD has maintained a downward trend since late January, as the US dollar has been consistently supported by a high interest rate environment and increasing risk-off sentiment across global markets.
However, after retreating to the lower range around 1.31–1.32, the pair has started to move into a consolidation phase, reflecting a temporary balance between USD strength and emerging expectation-driven support for the British pound.
On the UK side, the Bank of England continues to hold interest rates around 3.75% and remains cautious in its next policy steps. The UK economy is facing a familiar challenge of weak growth combined with persistent inflation, particularly given its high dependence on imported energy. This makes input costs highly sensitive to fluctuations in oil and gas prices, thereby prolonging inflationary pressures.
That said, a notable point is that, according to forecasts from major institutions such as JPMorgan, the BoE may still deliver at most one rate hike in 2026. This suggests that UK monetary policy has not fully shifted toward easing, and there remains room for further tightening should inflation reaccelerate. This factor helps prevent GBP from entering a one-sided decline, instead allowing it to maintain relative stability near its recent lows.
Meanwhile, the primary driver of the market continues to come from the Federal Reserve. The Fed is currently maintaining interest rates within the 3.50%–3.75% range, while US 10-year Treasury yields remain elevated around 4.3%–4.4%, continuing to attract strong global capital inflows. In addition, amid ongoing geopolitical uncertainties, the US dollar retains its role as a safe-haven asset, further reinforcing its strength.
However, it is important to note that the Fed’s policy space is no longer as flexible as before. In an environment where energy prices are trending higher again, cost-push inflation may place additional pressure on businesses and consumers. Further rate hikes under such conditions could increase the risk of economic slowdown rather than effectively containing inflation. As a result, a more plausible scenario is that the Fed will keep rates elevated for an extended period, rather than implementing additional hikes this year.
The combination of a Fed that is “higher for longer but unlikely to hike further” and a BoE that is “cautious but not ruling out tightening” is creating a relative equilibrium for GBPUSD. In the short term, the advantage still leans slightly toward the USD due to yield differentials and safe-haven flows, suggesting that any rebounds in GBPUSD are likely to remain technical in nature.
However, over the medium to longer term, as markets increasingly price in the prolonged high-rate environment in the US while recognizing the limited scope for further tightening, the upward momentum of the USD may begin to fade. Conversely, if the BoE is forced to respond to inflation with a rate hike, the policy divergence could narrow. This would open the possibility for GBPUSD to form a base in the current phase before gradually transitioning into a slower recovery trajectory.
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