- Conflicting drivers are preventing GBPUSD from finding a clear direction.
- The Bank of England is set to disappoint markets with the scale of its monetary tightening.
The British pound is consolidating against the US dollar amid persistent high geopolitical risks and uncertainty regarding the Bank of England’s monetary policy. The futures market expects the BoE to raise the repo rate by September and again in December. However, the OECD believes that the central bank will turn a blind eye to the highest inflation among G10 countries and keep borrowing costs at 3.75% throughout 2026.
Due to high yields on UK debt, sterling is sensitive to shifts in global risk appetite and to the futures market’s expectations of faster monetary tightening by the Bank of England compared to the Fed. This factor, coupled with five consecutive record highs for the S&P 500, has provided support for GBPUSD. As soon as the broad stock index retreated, the pair plummeted.
Pressure on the pound is being exerted by the weakness of the UK economy and labour market, as well as the risks of a change of prime minister following Labour’s defeat in the local elections. Investors fear that the new head of government will use fiscal stimulus aggressively, thereby inflating public debt and requiring a new bond issue. The OECD forecasts that the country’s debt will rise from 98.8% of GDP in 2023 to 105.4% in 2027 and recommends that London adhere to the principles of fiscal consolidation.
Thus, a variety of factors are contributing to a medium-term consolidation in GBPUSD. Developments in the Middle East will help the pair determine the direction of its future movement. For now, the White House appears reluctant to significantly escalate military action against Iran unless the situation deteriorates further. If this happens, an escalation of the conflict will boost demand for the US dollar as a safe-haven asset and push the pound towards $1.31.
On the other hand, the conclusion of a deal with Iran, even if its terms are vague and key issues are deferred to a later date, will provide fresh impetus for a rally in US stock indices and an improvement in global risk appetite. GBPUSD will head towards 1.37.
Traders should also factor in a possible surprise from the Fed. According to Morgan Stanley, the first FOMC meeting under Kevin Warsh’s leadership will shock financial markets and lay the foundations for a prolonged downtrend in the US dollar.
