GBP/USD. Analysis and Forecast

[Ben Graham]

Today, the GBP/USD pair is trading within a narrow range around the psychological level of 1.3500, remaining close to the weekly low recorded the previous day. Pressure on the British pound is increasing amid escalating domestic political tensions in the UK and rising expectations of monetary easing by the Bank of England. At the same time, the more hawkish rhetoric of the U.S. Federal Reserve is supporting demand for the dollar and preventing a more confident recovery in the pair.

The Green Party won a by-election, taking a safe seat in the Gorton and Denton constituency from Labor. This is viewed as a serious blow to the already weakened authority of Prime Minister Keir Starmer, reinforcing doubts about the stability of his leadership within the party.

This historic success by the Greens in the parliamentary by-election highlights the fragmentation of the traditional two-party system in the UK, increasing political uncertainty and putting additional pressure on the pound amid growing support for a Bank of England rate cut as early as May. Earlier this week, Governor Andrew Bailey, speaking before the parliamentary Treasury Committee, stated that there is scope for interest rate cuts as inflation is expected to return to the 2% target. The market interpreted this as a shift toward a more accommodative monetary policy stance.

Meanwhile, on the U.S. dollar side, market participants have scaled back expectations of more aggressive Federal Reserve easing following the release of the January FOMC minutes, which confirmed that the central bank is not in a hurry to accelerate the rate-cut cycle. Moreover, Fed officials discussed the possibility of another rate hike if inflationary pressures fail to subside, reinforcing a relatively hawkish outlook for Fed policy and keeping the U.S. dollar near monthly highs.At the same time, growing concerns about the potential economic consequences of President Donald Trump's trade policy—including the introduction of a 10% tariff with a possible increase to 15%—are limiting appetite for further long dollar positions and acting as a headwind for additional downside in GBP/USD.

Today, traders seeking better opportunities should focus on the release of the U.S. Producer Price Index (PPI), which, together with comments from key FOMC members, may provide fresh momentum for the dollar and determine the pair's short-term direction. A stronger-than-expected acceleration in producer prices could reinforce expectations that the Fed will maintain a tighter stance, supporting the dollar. Conversely, softer data could trigger a short-term pullback in the dollar from its highs and temporarily ease pressure on the pound.

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