Pound’s Rescue Comes From Beyond the UK. Forecast as of 07.08.2025
What matters more for the Bank of England: taming inflation or unemployment? Will the UK government choose to break its fiscal rules or its promises to voters? These are tough choices, but the British pound doesn’t seem to mind. Despite the difficulties, the GBPUSD pair continues to climb. What’s behind the resilience? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England is going to lower the repo rate.
- There is a £51 billion deficit in the UK budget.
- The Fed will loosen monetary policy more than the BoE.
- Consider buying the GBPUSD pair, targeting 1.348 and 1.36.
Weekly Fundamental Forecast for Pound Sterling
Choosing the lesser of two evils is sometimes inevitable. Despite UK inflation accelerating to a 17-month high of 3.6%, 0.2 percentage points above the Bank of England’s forecast, policymakers are still expected to reduce the repo rate for the fifth time in the cycle. Governor Andrew Bailey and his colleagues are concerned about signs of weakness in the labor market. A combination of tax hikes and elevated interest rates is pushing up unemployment, shifting the central bank’s focus from inflation to jobs. Yet none of this has stopped the GBPUSD pair from rising.
Inflation and Bank of England’s Benchmark Rate
Source: Bloomberg.
The Bank of England is likely to maintain a cautious stance. It is not expected to signal a rate cut in the near term, opting instead for a meeting-by-meeting approach. This data-driven strategy is currently working in favour of the pound. The split within the Monetary Policy Committee does not seem to be weighing on the pound either. According to Bloomberg, five out of nine MPC members are expected to support a 25-basis-point cut. Two would prefer to keep rates steady at 4.25%, while the remaining two are in favour of a deeper 50-basis-point cut.
The derivatives market is counting on at least two rounds of monetary policy expansion by the BoE before the end of 2025.
Bank of England’s Rate Cut Expectations
Source: Bloomberg.
As the Bank of England is trying to decide between inflation and unemployment, the government faces a different kind of challenge. According to the National Institute of Economic and Social Research, Rachel Reeves needs £51 billion to close the budget gap. As Chancellor of the Exchequer, she has a tough decision to make — raise taxes or cut spending, despite Labour’s earlier promises to avoid both. Alternatively, she may violate the fiscal rules altogether.
While the BoE and the UK government are dealing with their own challenges, the GBPUSD pair has been rising steadily for five consecutive trading sessions. The recent pullback in the uptrend was driven by expectations that large-scale investments from the US’s trading partners and $3.4 trillion in fiscal stimulus would keep the American economy resilient or even accelerate growth. However, those hopes were dashed by disappointing non-farm payrolls data.
The US is moving toward stagflation, characterized by slowing GDP growth and persistently high inflation. The Fed, similar to the Bank of England, is concerned about the cooling labor market, prompting the derivative market to anticipate three rounds of monetary expansion. The Fed’s faster pace compared to the BoE increases the likelihood of a renewed GBPUSD uptrend.
Weekly GBPUSD Trading Plan
The expected reduction of the repo rate to 4% in August has likely already been priced into the GBPUSD exchange rate. The Bank of England’s next step towards monetary policy easing will not stop GBPUSD bulls. Thus, the pound may rise to $1.348 and $1.36. Recommendation: buy.
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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