The British pound remains strong, supported by political stability, solid economic data, high yields, and a UK-US trade deal, though gains may be stretched. Meanwhile, the US dollar continues to soften despite strong data and falling recession odds, with near-term sentiment boosted by trade optimism. However, long-term risks persist, keeping the USD outlook weak to neutral.

GBP: Remain bullish

The baseline outlook of the British pound remain bullish, supported by several key factors. First, the UK is experiencing political stability, which continues to bolster investor confidence and underpin the currency. Second, the UK economy remains less exposed to the global trade tensions. This limited exposure makes the GBP a more attractive option in the current environment. Third, recent macroeconomic data from the UK has been solid, reinforcing the view that the economy is holding up well.

Coupled with relatively high interest rates compared to other developed markets, the GBP continues to offer favorable yield opportunities. Additionally, the announcement of a UK-US trade agreement has further boosted sentiment around the pound, strengthening the case for continued upside. Hedge fund positioning has also turned increasingly bullish, adding momentum to GBP appreciation. Currently, the markets assign an 84% probability to holding rates steady and a 16% probability to a 25‐bps rate cut by the BoE at its June 19th meeting. The interest rate path is more or less identical compared to last week, and the markets are pricing in 41‐bps of rate cuts over the next five meetings. However, be aware that the trend is quite stretched now and much of the positives are already priced in.

USD: Still sliding

As highlighted last week, the US economy hasn’t shown any signs of a materially weaker economy. The hard data from the US remains strong. Recession odds have dropped from 51% on May 12th, to 27% at the time of writing. This decline is largely attributed to the resilient economic data, incoming trade deals and speculation that a trade deal between US and China is just a matter of time, not if.

While the recent tariff-related developments, such as the court ruling and the postponement, are largely noise, they have fueled hopes that the tariffs may eventually be removed or canceled, supporting near-term risk sentiment. Additionally, the strong jobs report has also fueled risk sentiment, reinforcing optimism in the markets. However, Trump is not known for backing down. It’s likely he will challenge the court ruling and continue to push forward with the tariffs until he secures more favorable trade agreements.

As a result, we view longer-term risk sentiment as fragile for now, with a neutral/weak bearish outlook on the dollar. However, this week brings several key risk events, and the dollar’s trajectory will ultimately depend on their outcomes, along with any new trade-related headlines.

GBP/USD 4H

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