Sterling slid to 1.3320 after weak PMIs, dovish Bailey remarks, and a sharp USD rally on strong US data. Domestic signals are mixed — services still expanding but business confidence fragile, and tariffs on UK pharma add pressure. Yet markets are reluctant to price BoE easing, with sticky inflation keeping rate expectations firm. Fiscal jitters linger, but relative resilience in inflation and wages gives GBP support. Structurally, policy differentials should narrow as the Fed ultimately eases faster, while UK rates remain higher-for-longer. We shift bullish GBP/USD, favoring dips as buying opportunities if US data momentum fades.

GBP: Short term strength

The British Pound endured a volatile week, ultimately succumbing to weak domestic data and a powerful US Dollar rally. Sterling began on a firmer footing as GBP/USD attempted to reclaim the 1.3500 level, but the positive tone quickly unraveled on Tuesday after a surprisingly weak flash PMI report showed slumping business confidence and steep job losses, dragging the pair back below 1.35. Through mid-week, sentiment stayed fragile and was further pressured by dovish remarks from BoE Governor Bailey. The decisive move lower came on Thursday when a surge in the dollar, fueled by strong US data and a rout in Treasuries, drove Cable into freefall. The pair crashed through 1.3400 to a monthly low near 1.3323, and a modest Friday bounce reflected dollar consolidation rather than any genuine Sterling recovery. The week underscored how domestic worries were brutally amplified by external market forces.

The flash PMI release on Tuesday was the key domestic data point and a major disappointment. Services at 51.9 and the Composite at 51.0 remained in expansionary territory but fell well short of both expectations and the prior month’s levels, while Manufacturing slumped deeper into contraction at 46.2. The accompanying S&P Global report was stark, citing weakening growth, slumping overseas trade, worsening confidence, and steep job losses, much of it tied to anxiety ahead of the November budget.

BoE communication added another layer of uncertainty, with officials sending mixed signals. Governor Bailey struck a dovish tone on Wednesday, saying there was “still further room to cut rates,” though the market reaction was muted. On the other hand, Chief Economist Huw Pill noted that inflation was declining only sluggishly, and MPC member Greene said she was less concerned about rapid labor market deterioration while warning that inflation risks had shifted to the upside. Despite Bailey’s comments, money markets were reluctant to price in easing, with only around 6 basis points of cuts projected by year-end, suggesting investors remain focused on sticky inflation.

Trade developments turned negative for the UK late in the week after the White House announced new tariffs, including a 100% levy on branded pharmaceutical products. While the EU and Japan secured exemptions capping the tariff at 15% under existing agreements, reports indicated the UK would face the full 100%, raising the prospect of a significant headwind for a key export sector.

Market sentiment was also shaped by pre-budget jitters, with uncertainty around the November 26 fiscal event weighing on business optimism and adding to Sterling’s vulnerability. Ultimately, the Pound’s sharp decline in the second half of the week was driven less by domestic developments and more by external forces, as the powerful, data-driven US Dollar surge became the dominant driver of price action.

Sterling attempted an early recovery but was quickly derailed by weak PMIs and a strong dollar surge, which combined to send the currency to fresh monthly lows. Domestic signals remain mixed, with business surveys pointing to weaker confidence and job losses, while BoE speakers balanced dovish remarks from Governor Bailey with more cautious tones from Pill and Greene. The external backdrop turned harsher after US tariffs targeted UK exports, while pre-budget fiscal anxiety continues to weigh on sentiment. Still, the expected interest rate path has moved higher, which tempers the immediate downside.

Near term neutral. Sterling is caught between fragile domestic fundamentals and firmer rate expectations. The weak PMI run adds pressure, and fiscal jitters ahead of November keep the risk premium elevated, yet the repricing in front-end rates and sticky core inflation prevent a fully bearish tilt. The pound can still stabilize against peers if global risk appetite steadies or if US data fail to extend last week’s momentum, though its relative appeal remains limited compared with the euro or commodity bloc.

Longer term weak bearish. The medium-horizon view is unchanged: sterling remains constrained by weaker trend growth, persistent external deficits, and fiscal credibility concerns. Even if the BoE holds rates higher for longer, relative support is likely to fade as the Fed eventually eases faster. A more constructive stance would need consistent evidence of resilient wages and core inflation, plus calmer gilt dynamics. Conversely, a softer inflation and wage path or renewed fiscal slippage would push the pound lower. If the driver mix flips meaningfully or if policy guidance shifts more dovishly than expected, we will reconsider and lean toward a weaker currency until the data and pricing improve.

USD: Short at rally

The US Dollar staged a powerful mid-week reversal, shaking off early weakness to end the week with significant gains. The DXY began the week drifting lower, extending its post-FOMC decline to a low near 97.20 as a heavy slate of Fed speakers offered cautious commentary but no fresh catalysts. The narrative shifted on Thursday after a run of stronger-than-expected US data. Q2 GDP was revised up to 3.8% from 3.3%, led by a firm upgrade to consumer spending, Durable Goods orders for August jumped 2.9% versus a 0.5% decline expected with core capital goods also beating, and Initial Jobless Claims fell to 218k despite forecasts for an increase. Together, these releases pointed to a resilient economy and challenged the idea of an imminent slowdown. The dollar rallied sharply while Treasuries sold off as traders cut back bets on future Fed rate cuts, and the DXY broke above 98.00 to a weekly high above 98.6. The move paused on Friday when the August PCE inflation report came in exactly as expected, with core PCE up 0.2% month-over-month and 2.9% year-over-year, which matched Chair Powell’s earlier guidance and allowed the dollar to consolidate after its strong rise. Personal income and consumption were both slightly better than expected. Earlier in the week, S&P Global flash PMIs were broadly in line and did not move markets, while New Home Sales on Wednesday rose to 800k versus 650k expected and the August goods trade deficit narrowed noticeably.

Fed communication was mixed. Some officials leaned dovish, with Governor Miran repeating a case for aggressive 50-basis-point cuts and, on Friday, Vice Chair for Supervision Bowman cautioning that the Fed risks already being behind the curve on labor-market weakness and should act decisively and proactively. Others, including Bostic, Musalem, and Hammack, stressed caution about more easing due to inflation concerns, and Goolsbee warned against front-loading cuts based on slowing job data. Chair Powell on Tuesday largely repeated his press-conference message, balancing downside risks to employment with upside risks to inflation and noting that tariff impacts on prices should be a one-time pass-through. After Thursday’s data, markets scaled back easing expectations meaningfully, with the implied probability of another 25-basis-point cut by December dropping from over 70% to around 50%, and the amount of total cuts priced for 2025–2026 reduced as well. Treasury Secretary Bessent criticized the Fed for keeping rates too high for too long and confirmed plans to interview candidates for the Fed Chair position next week.

Trade and geopolitics added noise but did not change the broader story. Late Thursday into early Friday, President Trump announced new tariffs effective October 1, including a 25% tariff on imported heavy trucks, a 50% tariff on cabinets and vanities, a 30% tariff on upholstered furniture, and a headline 100% tariff on branded and patented pharmaceutical products. It was later clarified that the United States would honor a 15% cap for the EU and Japan, leaving the UK to face the full tariff. Tensions around Russia and Ukraine were elevated after President Trump told the UN that NATO should shoot down Russian aircraft that violate airspace and later signaled he was open to allowing Ukraine to use long-range US weapons to strike inside Russia.

Market mood evolved from a listless, negative drift for the dollar early in the week to stronger conviction after Thursday’s data. The subsequent rally reflected a pro-USD reaction to perceived US economic outperformance and a more favorable interest-rate gap, which weighed on US equities. The tariff headlines on Friday generated attention but did not overturn the main theme, as US equities rallied into the close and the dollar’s late-week pullback looked more like consolidation than a renewed reversal.

The dollar began the week on the defensive but flipped sharply higher after a string of upside surprises in US data and a scaling back of easing expectations. Revised GDP, resilient consumption, stronger orders, and firmer housing all underlined that growth momentum is not fading as quickly as the labor and confidence signals had implied. The move forced markets to reassess the pace of Fed cuts, lifting front-end yields and powering a broad USD rally, even as PCE inflation held steady.

Near term neutral. The strong rebound in data and the repricing in Fed expectations gave the dollar fresh support, and this strength may persist a bit longer if the upcoming releases remain dollar supportive. The main focus will be the jobs report on Friday and, to a lesser extent, Wednesday’s ISM manufacturing PMI, as both could reinforce the narrative of resilience and keep easing expectations under pressure. Unless these reports surprise meaningfully to the downside, the dollar can hold its firmer tone near term.

Longer term weak bearish. Our structural view remains that easing will resume into 2025 as unemployment grinds higher and differentials compress. The current resilience in growth and spending can delay but not prevent this adjustment, especially if the Fed leadership changes or bows to mounting political pressure. Reserve status and safe-haven demand will still offer countertrend strength in risk-off episodes, yet the medium horizon is capped by a policy trajectory that ultimately points lower. Only a durable sequence of stronger inflation and wages would tilt us toward upgrading the stance. If the driver mix flips meaningfully or if policy guidance shifts more dovishly than expected, we will reconsider and lean toward a weaker currency until the data and pricing improve.

GBP/USD 4H