Pound Eyes Fresh 2025 Highs Amidst Dollar Lull

Above: Bank of England Governor Bailey is expected to strike a 'dovish' tone on Thursday, which could result in GBP weakness.

Pound Sterling's recovery sequence against the U.S. Dollar is intact, Bank of England test awaits.

The Pound to Dollar exchange rate (GBPUSD) is engaged in a short-term recovery sequence that could see the 2025 high at 1.2523 tested before long.

GBPUSD saw some wild moves on Monday, falling to a low of 1.2248, as markets navigated a rapidly evolving tariff standoff between the U.S., Mexico and Canada.

"The dollar remains soft due to the de-escalation in the trade wars," says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman. "With the one-month delay on Canada and Mexico tariffs in effect and the 10% tariffs on China in place, we are in a lull and markets are reacting as one might expect."

Fears that Trump would bulldoze tariffs on his two neighbours sunk stocks and commodities and bolstered the Dollar, but a last-minute agreement between the three countries was reached, sending the Dollar into retreat.

That retreat allowed GBPUSD to recapture its break of the October-January downtrend line, which confirms that a short-term recovery is still in play:

Above: GBPUSD recovery sequence intact.

Support now emerges at the 23.6% Fibonacci retracement of that October-January selloff, which is at 1.2413, setting up the test of 1.2523 we look for.

Given the UK's low exposure to U.S. goods trade, GBP has proven relatively sturdy amidst the tariff dramas. As one X user quipped, the U.S. would struggle to find anything the UK manufactures.

"The pound emerged as a safe haven among pro-cyclical currencies and seems to be retaining some solid footing after an American trade war was averted. The reason is simple: the UK does not have much to lose from US tariffs," says Francesco Pesole, an analyst at ING Bank.

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Nevertheless, it is the Dollar that is in charge of GBPUSD price action, accounting for approximately 80% of its movement.

Trump is yet to hit the UK with tariffs but we think he will soon turn his gaze on European nations, which can limit GBPUSD's recovery potential to below 1.26.

"We think it’s only a matter of time before the EU and Japan come under threat. Until then, we view this correction in the dollar as a buying opportunity, as the fundamental drivers of dollar strength remain in place regardless of the tariff story," says Thin.

To be clear, this is a recovery in GBPUSD and not a rally; the broader setup remains fragile, and Trump will eventually comment on a gripe he might have with the UK and threaten some form of sanction.

Above: The UK has a limited exposure to U.S. goods trade. Image courtesy of Convera.

The Bank of England decision is getting closer, which should offer some GBP-specific price volatility in the coming 24 hours.

Markets expect another interest rate cut and a commitment to cut interest rates again in the coming months as it will acknowledge the slowing economy and rising unemployment rates.

This would amount to a 'dovish' cut that could put the Pound under near-term pressure.

The market would look to price in up to four interest rate cuts for 2025, up from the three it currently expects.

This would mechanically weigh on UK bond yields and the Pound.

However, the Pound has already made a notable adjustment to account for the deterioration in the UK's growth trajectory in 2025, with the currency falling against all its major peers in the first two weeks of the year.

This limits the scope for a meaningful decline if the Bank lowers its in-house growth forecasts and projects the need for more cuts. This information is effectively 'in the price' of the Pound and any Bank-inspired weakness should be faded.