GBP/USD eases from three-year high as US Dollar steadies on trade hopes
- The British Pound slips from a three-year high amid a modest rebound in the US Dollar.
- GBP/USD trades near 1.3500, down nearly 0.50% on the day.
- The UK’s stronger-than-expected inflation data from last week trims bets on rate cuts.
The British Pound (GBP) edges lower against the US Dollar, retreating from a three-year high, with the GBP/USD pair trading around 1.3510 during the American session on Tuesday.
The mild correction in spot prices comes as the US Dollar found footing on renewed trade optimism between the US and the EU. Hopes of a breakthrough in tariff negotiations between Washington and Brussels have lifted risk sentiment, lending modest support to the Greenback after weeks of pressure from fiscal concerns and a cautious Federal Reserve (Fed) stance.
That said, the British Pound’s broader strength remains largely intact, underpinned by domestic factors that have altered market expectations around the Bank of England’s (BoE) next moves.
“While the pound’s recent strength is largely a dollar weakness story, there are a few idiosyncratic factors at play,” said Michael Brown, senior research strategist at Pepperstone. “We did have a much more hawkish than expected May policy decision from the BoE, then compounding that we had hotter than expected UK inflation last week, which has seen participants continuing to trim their bets on BoE easing this year.”
Market participants are now pricing in a lower probability of rate cuts by the BoE in the second half of 2025, especially after last week’s CPI data surprised to the upside.
The Bank of England (BoE) cut its benchmark Bank Rate by 25 basis points to 4.25% at its meeting on May 8. However, market pricing has now adjusted firmly in favor of a pause, with Reuters reporting that 93.6% of traders expect the central bank to keep rates unchanged at the next meeting.
In the United States, fresh economic data released on Tuesday revealed that Durable Goods Orders for April printed at -6.3% from 7.6% growth in March, driven by a significant decline in orders for transportation equipment, particularly Boeing. Conversely, Consumer Confidence rebounded in May, with the Conference Board's index rising to 98.0 from 85.7 in April.
Looking ahead, traders await the FOMC Minutes on Wednesday, Q1 GDP revision on Thursday, and April PCE data on Friday. Fed speeches throughout the week may also guide rate expectations. Meanwhile, commentary from BoE policymakers could further shape the outlook for the British Pound.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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