GBP/USD Price Forecast: Sterling Holds 1.35 as Fed Pivot Offsets UK Fiscal Strain
Pound rebounds from 1.3389 lows after Powell’s dovish tone, but surging gilt yields near 5% keep pressure on the UK outlook | That's TradingNEWS
GBP/USD Recovers as Dovish Fed Signals Collide With UK Fiscal Strain
The pound is ending the week on firmer footing, with GBP/USD trading near 1.3527 after recovering from lows of 1.3389 earlier in the week. The rebound came as Jerome Powell’s Jackson Hole speech tilted dovish, fueling expectations of a September rate cut and driving broad dollar selling. Sterling’s strength, however, is tempered by the domestic backdrop, where persistent inflation near 4%, surging gilt yields close to 4.75%–5%, and rising UK government borrowing costs continue to weigh heavily on sentiment.
Sterling Faces Crisis Parallels With 1976 as Inflation Pressures Mount
Former Bank of England policymaker Andrew Sentance has drawn parallels with the 1976 crash, warning that the UK risks sliding into an IMF-style crisis if fiscal policies remain unchecked. Headline inflation is officially 3.8%, but Sentance argues real pressures are closer to 4.1%, with both demand-pull and cost-push drivers present. Borrowing is surging, and gilt yields rising toward 5% magnify debt servicing costs, raising fears of a vicious cycle where the pound and UK bonds fall in tandem. January’s brief sell-off to the 1.31 handle was a warning, but pressure could intensify in late 2025 if fiscal credibility does not improve.
Technical Picture: Support at 1.3389, Resistance at 1.3594
Price action this week saw GBP/USD rebound sharply after testing support at 1.3389, negating a bearish head-and-shoulders formation and instead carving out an upward channel. Momentum accelerated through the 50% retracement at 1.3463, with the pair clearing the 100-hour moving average at 1.3468 and testing the 200-hour moving average at 1.3505. The short-term ceiling remains between 1.3576–1.3592, where repeated failures have capped rallies since July. A decisive break above this zone would unlock upside potential toward 1.3730 and beyond, while losing the 200-hour average risks fresh declines back to 1.34 and 1.32. Longer-term projections see the uptrend from the 2022 low at 1.0351 still in play, with a medium-term target at 1.4004, provided the 55-week EMA near 1.3073 holds.
Dovish Fed Boosts Sterling but Domestic Fragility Caps Gains
Markets reacted aggressively to Powell’s hints that the Fed may begin cutting rates as soon as September, with the U.S. dollar sold off across the board. The yen led with gains over 1%, while the pound followed, erasing losses tied to UK fiscal pessimism. The relief underscores how sensitive GBP/USD is to global dollar flows. Yet structural UK risks remain: government borrowing is climbing, yields are spiking, and fiscal credibility is under scrutiny. Danske Bank expects EUR/GBP to climb toward 1.1235 in 6–12 months, reflecting expectations of relative sterling underperformance despite temporary relief from Fed-driven dollar weakness.
Macro Risks for GBP/USD Heading Into Year-End
Investors are weighing whether Powell’s dovish pivot will extend sterling’s relief rally or whether domestic risks will quickly cap the upside. Current projections suggest UK growth will lag peers, with fiscal expansion continuing to fuel borrowing needs. If gilt yields break decisively above 5%, the pound’s credibility could deteriorate sharply, mirroring past crises. Markets remember the IMF loan of $3.9 billion in 1976, half of which was drawn by the Callaghan government as the pound collapsed. The comparison may be politically charged, but rising debt costs, persistent inflation, and limited Bank of England policy space highlight why GBP/USD remains vulnerable even after this week’s rebound.
Buy, Sell, or Hold Verdict on GBP/USD
At 1.3527, sterling looks supported in the near term by global dollar weakness and strong technical defenses above 1.3389, but the UK’s fragile fiscal position prevents a bullish long-term stance. The technical chart points to potential gains toward 1.3590–1.3730 if momentum continues, but macro conditions argue caution. With upside capped by domestic credibility risks and downside cushioned by Fed easing bets, the balance favors a Hold stance on GBP/USD—attractive for tactical trades, but not yet compelling for a structural bullish position.
