The pound remains the top performer among G10 currencies, supported by positive trade talks with the US, constructive outcomes from the recent UK-EU summit, and strong domestic economic data. In contrast, fiscal concerns and tariff policies continue to weigh heavily on the US dollar.

GBP: Best G10 Currencies

The GBP has proven to be one of the more resilient G10 currencies in recent days, partly due to incoming UK data indicating that the economy is holding up better than expected. Looking into the details, the Pound was the best performer among G10 currencies over the past week, supported by both international and domestic developments. Starting with the former, while the UK-EU summit did not deliver any game-changing outcomes for sterling, it was a mildly positive event and should continue to provide modest support for the currency over the summer. On the domestic front, the release of the UK April CPI came in hotter than expected: headline inflation rose to +3.5% from +2.6%, core CPI jumped to +3.8% from +3.4%, and services CPI—which is closely watched by the BoE—surged to +5.4% from +4.7%, exceeding the BoE’s forecast of 5%. As a result, market participants reassessed their rate cut expectations.

Although services CPI saw a significant jump, some institutions such as ING and Mizuho argued that this spike was likely a one-off, driven by temporary factors like road tax, higher airfares, and holiday package prices—all of which were distorted by the timing of Easter and the specific April survey date. Meanwhile, more structural components such as rents, catering, and medical care continued to show a deceleration in year-on-year inflation. Hence, the BoE may choose to look through this hot CPI print. That said, market pricing has now adjusted—expecting 34 bps of easing in 2025 (down from 41 bps), with the next cut fully priced in for November. This reduction in rate cut expectations could provide additional near-term support for the GBP. Moreover, the released of the April retail sales report further support the strength of the GBP, came it at +5.0% y/y from +1.9%, and ex autos and fuel came in at +5.3% y/y, from +2.6%. In terms of the BoE’s commentary, Pill noted that his dissenting vote stemmed from a concern that the pace of withdrawal of monetary policy restriction since last summer is too rapid, given the balance of risks to price stability and he added that his vote should be seen as a skip and not a halt to the withdrawal of the restriction process. Thus, his hawkish comment further support the GBP, marginally.

Looking ahead, the GBP calendar remains relatively light, with no major market-moving events scheduled. As such, growing confidence in the UK’s domestic growth prospects, stronger-than-expected CPI data, hawkish BoE commentary, and improved UK-EU relations are all contributing to an incrementally bullish sentiment on sterling relative to other cyclical G10 currencies. Additionally, from a global perspective, the improving risk environment is also supportive for the GBP. Overall, the baseline outlook for the GBP remains bullish, backed by solid domestic fundamentals and positive risk sentiment.

USD: Uncertainty ahead

Over the past week, the US dollar remained under pressure, driven by two key developments. Firstly, Moody’s downgraded the US credit rating from AAA to Aa1+, citing concerns over limited budget flexibility and persistently large fiscal deficits, which are increasing the government’s debt and interest burden. Additionally, the House Rules Committee passed President Trump’s tax and spending bill, a bearish factor for US Treasuries (USTs) as it would further elevate the US debt level. The US 30Y yield briefly touched 5.135% last week before retreating back to the 5% level. Secondly, renewed trade tensions resurfaced after Trump threatened Apple with a 25% tariff and announced 50% tariffs on the EU, set to take effect on June 1st. He also stated he is not seeking a deal with the EU. In response, the EU trade chief said the bloc is prepared to defend its interests, indicating a swift resolution is unlikely. As a result, the combination of fiscal concerns and renewed trade uncertainty could revive the ‘Sell America’ narrative in the week ahead, pressuring the USD further in the near term.

Looking ahead, market attention will turn to upcoming US data releases: consumer confidence, GDP, and April core PCE—the Fed’s preferred inflation gauge. Notably, following softer-than-expected April CPI and PPI prints, the PCE report could further support the view that the disinflation process is on track. Fed Chair Powell recently indicated that April PCE is likely to come in around 2.2% y/y, although this estimate may not yet incorporate the weaker PPI data. Overall, the baseline outlook for the USD remains bearish for now. While much of the negative news is arguably priced in, the reemergence of trade tensions adds further downside risk to the dollar in the near term.

GBP/USD 4H

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