Pound Sterling Weakens Against Dollar Amid U.S.-EU Trade Deal Optimism

Pound Retreats from Three-Year High

The Pound Sterling (GBP) slipped to around 1.3540 against the U.S. Dollar (USD) during Tuesday’s North American session, May 27, 2025, pulling back from a three-year peak of 1.3600 reached the previous day. The GBP/USD pair’s decline was driven by a resurgent U.S. dollar, fueled by growing optimism over a potential swift trade agreement between the United States and the European Union. The U.S. Dollar Index (DXY), which measures the dollar’s performance against six major currencies, rose to 99.35 after finding support near a monthly low of 98.70.

U.S.-EU Trade Hopes and Tariff Concerns

U.S. President Donald Trump boosted market sentiment by announcing on social media that the EU had initiated efforts to schedule trade talks promptly, describing the move as positive. Despite this, the dollar’s outlook remains uncertain as investors grapple with the implications of Trump’s trade policies. Federal Reserve officials have raised concerns about stagflation risks under Trump’s economic agenda. Minneapolis Fed President Neel Kashkari emphasized during European trading hours that he favors maintaining steady interest rates until the impact of tariffs on prices and growth becomes clearer, noting that tariffs pose a stagflationary threat and heighten uncertainty for businesses and policymakers.

UK Economic Strength Tempers BoE Rate Cut Expectations

The pound held firm against most major currencies, except the dollar, as robust UK economic data reduced expectations for aggressive Bank of England (BoE) rate cuts. First-quarter GDP grew by 0.7%, April’s headline CPI accelerated to 3.5% year-on-year, and retail sales surged 1.2% month-on-month, per the Office for National Statistics. These figures prompted traders to scale back dovish bets, with futures markets now pricing in a modest 38 basis points of rate cuts by year-end, suggesting one 25-basis-point cut and a 50% chance of another. The BoE’s recent 25-basis-point rate reduction to 4.25%, coupled with Chief Economist Huw Pill’s caution against rapid cuts, reinforced a measured approach to monetary easing, citing persistent inflation risks.

U.S. Economic Data Disappoints

In the U.S., April’s Durable Goods Orders fell 6.3% month-on-month, a milder decline than the anticipated 7.9% but a sharp reversal from March’s 7.6% gain, according to the Census Bureau. This weaker-than-expected data added to concerns about economic momentum, though it was overshadowed by trade-related developments. The interplay of U.S. trade optimism and UK economic resilience continues to shape GBP/USD dynamics, with markets awaiting further clarity on global trade and monetary policy.