Another bearish week for the British Pound led to the second consecutive weekly retracement for GBP/USD, which was primarily driven by geopolitical concerns rather than domestic issues, while market participants currently do not expect the Bank of England (BoE) to resume interest rate cuts this year. Instead, markets pencil in around 50 basis points of tightening by year-end.
GBP/USD: Supported by rates, but starting to look fragile
Sterling has held up reasonably well recently, but the story underneath is starting to look a bit more fragile.
At first glance, the move makes sense. Markets have aggressively repriced BoE expectations, shifting from rate cuts to the possibility of further tightening. That swing has provided a solid cushion for the British Pound, helping it outperform most of the G10 space outside of the US Dollar and commodity currencies.
But that support is doing most of the work.
Rates are carrying the story
The resilience in GBP is largely a rates story.
The front end of the UK curve has moved sharply, with markets quickly abandoning easing expectations and leaning toward further tightening. Inflation risks, particularly from higher energy prices, have taken centre stage.
That repricing has helped stabilise the pound, even as the broader macro backdrop remains far less convincing.
And that is the key issue.
A good portion of this support now looks priced in.
The macro picture is less comfortable
Step back, and the UK economy still looks vulnerable.
Growth was already on the soft side heading into the latest geopolitical shock, and the mix is now leaning more clearly towards stagflation: inflation pressure is picking up again, while activity cools and the labour market gradually loosens.
At the same time, familiar structural concerns are creeping back into view. The UK’s current account deficit and its sensitivity to higher borrowing costs are once again part of the conversation.
This scenario is where things become more complicated.
Higher short-term rates tend to support the currency. However, the rising long-end yields are indicating a completely different narrative. The recent move higher in gilts reflects growing concerns around fiscal sustainability and funding costs, and that has not historically been a supportive backdrop for GBP.
Positioning is improving, but not convincing
Positioning adds another important layer.
Speculative accounts have been clearly reducing short GBP exposure, with net shorts narrowing steadily in the last three weeks. But price action is not really confirming the shift, with Cable navigating the mid-1.3300/1.3400 area without extending meaningfully higher.
That combination matters.
This appears more like a slow short squeeze than a real buildup of bullish bets. Investors are backing off of negative bets, but they haven’t yet made a long-term commitment.
Open interest reflects a similar story: it is going down and pointing to position reduction instead of new inflows.
The main point is rather clear.
Positioning is becoming less bad, but it’s not quite good. If prices don’t follow through more strongly, this adjustment might lose speed soon, particularly if the economy becomes worse or the US Dollar gains ground.
The silent hazards of energy and politics
In the background, two threats are gradually growing.
Energy is the first thing. Prices are expected to go up since the UK imports more than it exports. This makes the trade-off between inflation and growth more difficult and keeps the stagflation tale running.
The second thing is politics. The closer the UK elections come, the more likely it is that there will be political noise. Changes in expectations regarding fiscal policy or leadership might have an immediate effect on the gilt market and, as a result, the currency.
GBP/USD: What may happen next
- Base case, rangebound with a softer tone
GBP/USD continues to trade within a 1.3200–1.3500 range, but with a slight downside bias. The BoE repricing still offers some support, but it begins to lose momentum as markets question how far tightening can realistically go in a weak growth environment. At the same time, the US Dollar remains relatively firm.
- Bull case: needs a convincing reason to occur
For a real rise, something has to change. The Dollar might weaken if US data is softer or the Fed sends a sharper dovish signal. This could let Cable go beyond 1.3500. It would also help if energy costs stabilised or if people throughout the world felt less risky. In such case, positioning may ultimately develop into real long-term accumulation.
- Bear case: Risks go down
It appears simpler to follow the road down. The US Dollar is becoming stronger, geopolitical tensions are increasing again, or UK gilts are under additional pressure, which might force Sterling to weaken. If the economy slows down or people become worried about the budget, spot might fall back into the 1.3000–1.3100 region, particularly if fresh shorts start to build up again.
What to look for
The US Dollar’s trajectory is evident for the time being, mainly via rates and Fed forecasts. Other factors include changes in Oil prices and the Middle East war, swings in UK gilt yields, and new UK statistics, especially on growth and the job situation.
Bottom line
Sterling is still holding up, but it is doing so on increasingly narrow support.
As long as the rate story dominates, GBP can remain resilient. But without a stronger macro backdrop or clearer conviction from investors, the balance of risks is starting to shift, and not in the quid’s favour.
