The Pound Sterling is gaining strength compared to other currencies as expectations for the Bank of England’s monetary policies change. This follows a 3.5% increase in the UK Consumer Price Index and a 1.2% rise in Retail Sales in April. So far this year, the futures market is predicting a drop in UK rates by 38 basis points. This suggests a possible 25 basis point rate cut, with a chance for a second cut. The Pound Sterling has reached a three-year high close to 1.3600 against the US Dollar, even with market holidays in the UK and US. The outlook for the GBP/USD pair is positive, as the US Dollar is weakening due to changing tariff policies.

US Dollar Index and Market Effects

The US Dollar Index is nearing its monthly low of 98.70 after the EU postponed tariffs. The recent delay in tariffs by the US President offers slight relief, but doubts about the US Dollar’s stability remain. The Australian, Canadian, and New Zealand Dollars benefit from positive market conditions linked to commodities. In contrast, “risk-off” markets favor safe-haven currencies like the US Dollar, Japanese Yen, and Swiss Franc. Currency movements show the US Dollar’s weakness, especially against the New Zealand Dollar. Moving averages and technical indicators suggest that GBP/USD will likely remain strong, with potential challenges above and support below the current levels. Recent data and market movements indicate that we’re in a brief period where interest rate expectations can provide an advantage. We are witnessing a shift in the UK’s monetary policy forecasts, which have become more aggressive due to stronger-than-expected consumer inflation and increased retail volumes. With CPI rising by 3.5% year-on-year and retail figures showing a monthly increase, this data pushes the Bank of England away from the idea of rapid multiple rate cuts. As the implied rate forecast has pulled back to just 38 basis points of easing for the rest of the year, the likelihood of two full cuts has decreased. It now seems more likely that a single 25 basis point cut may happen, with the second cut depending on further weak data—not guaranteed. This shift is significant for pricing models. The recent rise of Sterling toward a three-year peak against the Dollar, nearing 1.3600, isn’t solely influenced by UK factors. The Dollar is also showing vulnerability. The delay in US-EU tariffs has provided temporary support for risk assets and currencies sensitive to global trade. However, this delay introduces uncertainty regarding US policy, weakening the perceived stability of the US dollar. We’ve seen this reflected in the continued gains of commodity-linked currencies like the Aussie and Kiwi.

Current Market Trends and Indicators

The current risk environment shows shifts in preference based on market sentiment. When markets feel secure, currencies tied to growth and commodities gain popularity. But when anxiety rises, safe-haven currencies like the Yen and Swiss Franc are favored. Sterling is in between, drawing from both risk sentiment and rate differences. We’re also noticing support from trend signals. Looking at standard moving averages—20, 50, and 100 periods—the overall outlook remains positive for the Pound. Momentum indicators, such as RSI or MACD, continue to confirm this trend. The focus now is on responding correctly to any pullbacks. Support can be found below 1.3500, and as resistance above gradually fades with increased trading volume returning from the holidays, we can look to scale entries in phases. With the Dollar Index close to its monthly low and market positions indicating a retreat in speculation, it’s wise to consider any rallies in the Dollar as temporary rather than the start of new trends. Additionally, examining Sterling’s performance against the Australian or Canadian Dollar can provide clearer signals for relative positioning without the noise of US policy changes. While risk appetite may decrease, the combination of seasonal effects, weakening Dollar strength, and less aggressive UK rate forecasts than previously expected keeps this environment open for trading. The only necessary adjustment is to reduce leverage and set more responsive stop-loss orders while trading volume is still lower than average. Create your live VT Markets account and start trading now.

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