Pound Rises Slightly Amid BoE Inflation Fears. Forecast as of 18.09.2025
High prices in the UK could result in the Bank of England’s interest rate surpassing that of the Fed by the end of 2026, setting the stage for a rally in the GBPUSD pair. However, capital flows could hinder this scenario. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England is unlikely to cut rates in 2025.
- The BoE is more concerned about inflation than unemployment.
- The pound reacts differently to trading volumes than the euro and the yen.
- Long trades on the GBPUSD pair can be considered with targets of 1.387 and 1.4.
Weekly Fundamental Forecast for Pound Sterling
When the central bank is concerned, it is forced to take a cautious stance. The Bank of England’s acute headache is the rise in annual inflation expectations in the UK from 3.2% in May to 3.6% in September, the highest level since August 2023. The five-year indicator has also jumped to 3.8%, notching the highest level since 2019. While the Fed is worried about the labor market, the BoE’s fears are related to consumer prices. This caution is one of the factors behind the rally in GBPUSD quotes.
UK Inflation Expectations
Source: Bloomberg.
While MPC members nearly clashed in August over whether to lower the repo rate, the situation now appears crystal clear. Investors expect borrowing costs to remain at 4%, as a result of a 7–2 vote.
The Bank of England is prepared to overlook signs of economic weakness as long as inflation remains under control. Meanwhile, employment has been falling for seven consecutive months. However, the decline in August was more modest than expected. As a result, rumors began to circulate that the labor market had reached its lowest point. The GBPUSD pair responded calmly to the lack of GDP growth in July. The government claims that the UK economy is expanding faster than other G7 countries.
Before the BoE’s August meeting, the derivatives market expected another repo rate cut in 2025; now, it does not foresee this happening. The market has reduced the expected scale of monetary policy easing by the end of 2026 from 60 bps to 40 bps, meaning that by the end of next year, interest rates in the UK will be higher than in both the eurozone and the US. As a result, the pound will likely outperform its G10 counterparts.
BoE Interest Rate Trajectory
Source: Bloomberg.
However, monetary policy is far from being the only driver of changes in GBPUSD quotes. According to Morgan Stanley, the pound reacts much more sharply to the volume of transactions than the euro or the yen. Although the latter currencies account for 31% and 17% of transactions on Forex, respectively, and the pound sterling accounts for 13%, the euro or the yen are capable of absorbing volumes of $1 billion with minimal price changes. The British pound is more sensitive, resembling the Swiss franc or the New Zealand dollar in this regard.
G10 Currencies’ Reaction to Trading Volumes
Source: Bloomberg.
The reason, according to Morgan Stanley, lies in the pound’s heightened sensitivity to capital flows. In this regard, the rally in the S&P 500 and the associated increase in global risk appetite are bullish drivers for the GBPUSD, while fears of capital flight due to the UK’s budget problems represent bearish factors.
Weekly GBPUSD Trading Plan
Meanwhile, bullish factors outweigh the bearish ones. The GBPUSD pair may still resume its upward trend. The current pullback should be used to increase long trades formed at 1.341 and 1.35, with the targets at 1.387 and 1.4.
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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