GBP/USD Price Forecast - Pound to Dollar Holds Above 1.34 as Fed Cut Bets Offset BoE Dovish Pressure

GBP/USD (1.3414) Holds Firm Amid Fed Cut Bets and Political Gridlock in Washington

The British Pound (GBP/USD) opened the week in cautious trade near 1.3414, steady above the 1.3400 mark as U.S. dollar weakness helped offset renewed concerns about the Bank of England’s dovish policy path. The U.S. Dollar Index (DXY) slipped toward 98.40 after the 19-day government shutdown deepened, eroding investor confidence and fueling bets that the Federal Reserve could deliver two rate cuts before year-end. Futures markets now price a 100% probability of a 25-bp cut in October and a 96% chance of another in December, as officials such as St. Louis Fed President Alberto Musalem voiced support for further easing if employment risks rise.

Mixed Drivers Anchor the Pound Despite Fiscal and Labor Headwinds

The pound’s latest rebound follows a recovery from 1.3250, its lowest level since early August. The move was largely technical, aided by short covering after a three-week slide and renewed inflows into risk assets. However, fundamentals remain uneven. UK labor data released by the Office for National Statistics showed the unemployment rate rising to 4.8%, a four-year high, while average earnings growth slowed to 4.7%, signaling weaker wage momentum. These figures reinforce expectations that the BoE could continue trimming rates gradually to support growth. Traders now anticipate one additional 25-bp rate cut before the November Autumn Budget, where fiscal consolidation measures are expected to weigh further on domestic demand.

Fiscal concerns have re-emerged as investors await details of the UK government’s spending plans. Economists at ING warn that “tighter fiscal and looser monetary policy should ultimately be a bit bearish for sterling.” Chancellor Jeremy Hunt faces pressure to close a widening deficit without triggering a repeat of the 2022 gilt-market turmoil. Any hint of higher borrowing or delayed tax adjustments could rekindle volatility across gilt yields and spill into GBP/USD valuations.

U.S. Dollar Volatility Keeps Cable Range-Bound

Dollar sentiment remains fragile amid prolonged political paralysis in Washington. The shutdown’s economic cost is projected to shave 0.3 percentage points from U.S. Q4 GDP, further cementing expectations of monetary easing. Still, intermittent rebounds in the greenback have capped the pound’s upside. The DXY briefly recovered from 98.00 to 98.68, testing resistance near its 50-day EMA at 98.59, before sellers re-entered.

From a technical standpoint, GBP/USD continues to oscillate between 1.3380 and 1.3516, anchored by converging 50- and 200-day EMAs. A sustained break above 1.3450 could open room toward 1.3516, aligning with the September Volume Point of Control (VPOC), while failure to hold above 1.3380 risks a drop toward 1.3300 and potentially 1.3250 if risk aversion returns. The RSI (14) sits near 48, underscoring indecision after last week’s rally, while momentum indicators remain neutral.

Trade Tensions, CPI Data, and Risk Sentiment Set the Tone

Global trade tensions continue to shape near-term flows. The renewed U.S.–China tariff standoff has unsettled markets, but President Donald Trump’s softer rhetoric this week—expressing optimism about Chinese purchases of soybeans—offered modest relief. Treasury Secretary Scott Bessent is scheduled to meet Vice Premier He Lifeng in Malaysia to discuss tariff alignment, and any progress could lift risk sentiment and favor the pound.

The upcoming U.S. CPI report looms as the week’s decisive catalyst. Consensus expects headline inflation to cool to 2.3% YoY, reinforcing the Fed’s dovish bias. A softer print could accelerate the dollar’s retreat and push GBP/USD closer to 1.3516, whereas a surprise uptick above 2.6% may revive rate-hike speculation and drive a corrective pullback toward 1.3350

Market Positioning: Traders Favor Buying Dips Above 1.3380

Market positioning reflects cautious optimism. Speculative net-long exposure on the pound has edged higher for a third consecutive week, while volatility in short-dated GBP options dropped to 7.8%, its lowest in two months. This suggests traders are favoring dip-buying strategies above 1.3380, betting that dollar weakness will persist as global yields retreat. Still, macro uncertainty—particularly surrounding the UK’s fiscal stance and fragile growth outlook—limits conviction for a full breakout.

Outlook: Cautious Bullish Bias for GBP/USD (1.3414)

After reclaiming ground from 1.3250 lows, GBP/USD enters the week supported by expectations of U.S. policy easing but constrained by domestic headwinds. The pair’s near-term trajectory hinges on inflation data and political developments in both London and Washington. As long as support at 1.3380 holds, the bias remains slightly bullish, targeting 1.3516, though any disappointment in U.S. dovish expectations or renewed fiscal stress in the UK could swiftly shift sentiment back to neutral.

For now, the balance of risks favors holding long exposure above 1.3380, with a measured Buy bias toward the 1.35–1.36 zone, contingent on a sustained soft-dollar backdrop and steady UK yields.

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