GBP/USD forecast: Forex Friday – May 23, 2025

Today’s stronger UK retail sales print further underpinned the GBP/USD. Hitting its highest level since February 2022, the cable was testing the $1.35 handle at the time of writing on the back of a 5-day winning run. The GBP/USD has been supported from both sides of the pond: stronger UK data and a weakening US dollar. Unless something changes fundamentally or we see a bearish technical reversal now that rates are testing a multi-year resistance band between $1.35 to $1.40, the short-term GBP/USD path of least resistance remains modestly to the upside. The broader resilience in the GBP/USD forecast appears driven less by sterling strength and more by a faltering US dollar. Markets remain fixated on Washington’s deepening structural woes—chief among them, ballooning debt levels. Trump’s tax cuts remain a point of fiscal contention, and investors are gradually waking up to the uncomfortable truth: unless there’s a meaningful course correction in US fiscal policy, the cost of government borrowing could spiral. Over time, such a trajectory could prove deeply damaging to the world’s largest economy. Meanwhile, today’s US macro calendar is light, but there will be more macro pointers in a holiday-shortened week ahead.

Source: TradingView.com

US dollar remains undermined

Concerns remain over US Treasuries and is one of the reasons why the dollar continues to find sellers despite rising long term bond yields. Long-dated US Treasuries managed to claw back some of their recent losses yesterday and that helped the dollar a little. Yet, the dollar selling has resumed today. It looks like investors are concerned that yields will remain elevated and could increase even further in the days and weeks ahead, without a fundamental shift in US fiscal policy. The implications of rising US borrowing costs and widening fiscal deficits means the US is on an unstable fiscal policy path, which could lead to heighten market volatility, while reducing the appeal of the greenback in favour of haven currencies.

GBP/USD forecast: Pound underpinned by domestic data

In the UK, following a hotter CPI report earlier this week, and stronger wages and GDP data from the previous week, retail sales also topped expectations today with a 1.2% month-on-month reading. Expectations were for a more modest 0.3% rise in sales. Meanwhile, the GfK Consumer Confidence index also improved, albeit remained in the pessimism territory at -20 compared to -22 expected and -3 last.

The recent run of hotter-than-expected UK data underscores the hawkish rate cut by the Bank of England earlier this month, amid concerns over sticky nature of services inflation. In April 2025, services inflation reached 5.4%, the highest in eight months, up from 4.7% in March. At such levels of services inflation there is little wonder as to why the Bank didn’t give any indications that it’s about to speed up the pace of its easing cycle.

Week ahead macro highlights for GBP/USD

There are bank holidays on Monday in both the UK (Spring) and US (Memorial Day). Some of the major mainland European nations are out on Thursday in observance of Ascension Day. The US macro calendar picks up, while from Europe and UK it is all secondary pointers. Here’s the data highlights for the week ahead relevant only for the GBP/USD forecast:

US GDP and Core PCE price index among key US data highlights

US GDP is released on Thursday while Core PCE price index comes in a day later on Friday.

Despite its name, this is the second estimate of GDP for the first quarter. The world’s largest economy contracted 0.3% in Q1 as per the Advance estimate, released a month ago. Let’s see if revised data shows any major changes in output.

With regards to core PCE index, well this is the Fed’s favourite inflation gauge so it will carry extra weight. Last month showed a surprise flat reading, when a small increase was expected amid trade war uncertainty. Traders will be watching for a surprise deviation from the expected figure to trade the dollar in the direction of surprise.

In summary

The overall strength in the GBP/USD forecast stems more from a weakening US dollar rather than a strengthening pound. This is because investors remain focused on the structural problem looming over Washington: surging debt levels. Trump's tax cuts are fiscally contentious, and markets are beginning to reckon with the risk that, without a shift in US fiscal policy, government borrowing costs could soar. In the long run, this could be very damaging to the world’s largest economy.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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