Pound Ticks Higher as UK Inflation Hits 18-Month High. Forecast as of 28.08.2025
The divergent pace of monetary expansion, Britain’s robust economy, and the US’s path toward fiscal dominance are fuelling a rally in GBPUSD quotes. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The British economy is outpacing its G7 peers.
- The Bank of England does not consider unemployment a problem.
- The US administration’s policy is weakening the US dollar.
- Long positions on the GBPUSD pair can be opened with targets of 1.365 and 1.385.
Weekly Fundamental Forecast for Pound Sterling
The Bank of England is maintaining one of the highest key interest rates among the G7 countries. What other options does it have when dealing with a cooling labor market and still-high inflation? In Jackson Hole, Andrew Bailey stated that unemployment did not pose a significant challenge to the UK economy. The combination of a low labor force participation rate and low productivity is particularly problematic. These factors may hurt GDP growth. However, such rhetoric failed to force GBPUSD bulls to retreat.
Central Banks’ Interest Rates
Source: Bloomberg.
There is a general consensus in the market that the UK economy is thriving, as evidenced by the expansion of PMI to its highest level in the last 12 months, the best GDP growth among the G7 countries in the second quarter, and increased consumer confidence. Meanwhile, Capital Economics doubts that this is the case, suggesting that the current improvements are cyclical in nature rather than structural.
The prevailing economic theory posits that a robust economy is incompatible with low inflation. As expected, UK-based companies saw their product prices rise to their highest point in two years during the second quarter, with food prices reaching 18-month highs.
UK Food Inflation Change
Source: Bloomberg.
Soaring inflation is an acute headache for the Bank of England, leading to a divergence of opinion within the MPC. At its last meeting, the Committee required a second vote to determine the repo rate. The expectation that it will remain at 4% until almost the end of 2025 is providing a boost to bulls on the GBPUSD. By the end of December, the federal funds rate could fall by 50 basis points.
The divergent monetary expansion strategies employed by the Bank of England and the Fed push the GBPUSD pair higher, especially given that the US’s pursuit of fiscal dominance is likely to result in a long-term weakening of the US dollar. Notably, Donald Trump wants to establish a dovish majority in the FOMC. More Fed governors may be fired. Should this occur, the US dollar may plunge significantly in 2025.
The British pound is facing challenges that cannot be ignored. In order to avoid turmoil in the financial markets, Rachel Reeves needs to find approximately £50 billion to address the budgetary shortfalls. It appears that tax increases are unavoidable, and this will result in a slowdown in GDP growth.
Weekly GBPUSD Trading Plan
Given the strength of the British economy, the Bank of England’s measured approach, and the US’s shift toward fiscal dominance, the upward trend for the GBPUSD pair remains intact. Long trades can be opened on pullbacks, as was the case with the rebound from the support level of 1.339. The bullish targets are 1.365 and 1.385.
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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