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The Pound Sterling rallied, with GBP/USD climbing 0.15% to 1.3300, fueled by a new US-UK trade agreement and a hawkish Bank of England (BoE) rate cut to 4.25%. Despite robust US jobless claims data, the US Dollar struggled, as the Federal Reserve’s decision to hold rates at 4.25%-4.50% underscored tariff-driven risks. The BoE’s divided 7-2 vote, with two members favoring no change, signaled caution, boosting the Pound’s appeal. This report explores the interplay of monetary policies, trade developments, and market dynamics shaping the GBP/USD surge.
BoE’s Hawkish Cut Sparks Pound Rally
The Bank of England reduced its key interest rate by 25 basis points to 4.25% on May 8, as anticipated, but the 7-2 vote split revealed a hawkish tilt. Two members voted to keep rates at 4.50%, while two others pushed for a 50-basis-point cut, and five supported the 25-basis-point reduction. This three-way split, perceived as cautious, bolstered the Pound, signaling the BoE’s reluctance to ease aggressively amid inflationary pressures. The GBP/USD pair held above 1.3300, reflecting the market’s positive response to the BoE’s stance and its divergence from the Fed’s steady policy.
US-UK Trade Deal Lifts Sentiment
A landmark US-UK trade agreement, announced after a call between President Donald Trump and Prime Minister Keir Starmer, provided a significant tailwind for the Pound. Trump hailed the deal as opening “a tremendous market” for both nations, emphasizing mutual benefits. The agreement, set to enhance trade flows, eased concerns about global tariff tensions, particularly after Trump’s 100% duties on foreign films and planned pharmaceutical tariffs. This optimism propelled GBP/USD higher, overshadowing solid US economic data and reinforcing the Pound’s strength against a resilient but softer US Dollar.
Fed’s Rate Hold and Powell’s Caution
The Federal Reserve maintained its federal funds rate at 4.25%-4.50% on May 7, citing heightened risks to its dual mandate of maximum employment and price stability. Chair Jerome Powell, in his press conference, is expected to highlight tariff-driven inflation risks, with March’s 2.6% inflation and April’s Prices Paid Index at 65.1 signaling persistent pressures. He will likely note April’s 177,000 Nonfarm Payrolls and 4.2% unemployment rate as evidence of labor market strength, justifying the Fed’s pause. Powell’s remarks will emphasize a wait-and-see approach, with markets pricing in a 62% chance of a July rate cut, keeping the US Dollar firm at 99.89 but unable to outshine the Pound’s rally.
US Jobless Claims Bolster Economic Outlook
US Initial Jobless Claims for the week ending May 3 fell to 228,000, beating expectations of 230,000 and down from the prior week’s 241,000, per the US Department of Labor. This robust data underscored the Fed’s rationale for holding rates, suggesting a resilient labor market despite tariff uncertainties. However, the US Dollar’s gains were muted, as the GBP/USD rally, driven by the BoE’s hawkish cut and the US-UK trade deal, dominated market sentiment. The Dollar’s index, at 99.89, held above its 200-day moving average of 99.50, with support at 99.00 and resistance at 100.00.
GBP/USD Technical Outlook and Market Implications
The GBP/USD’s uptrend faces challenges, with three days of lower highs and lows signaling waning buyer momentum. The Relative Strength Index (RSI) at 58.14, its lowest since mid-April, suggests sellers are gaining traction. For bullish continuation, GBP/USD must break 1.3400, targeting the year-to-date high of 1.3443 and potentially 1.3500. A drop below 1.3300 risks testing 1.3250, with further declines eyeing 1.3200. Equities, including the Dow Jones at 41,113 and S&P 500 at 5,617, gained on trade optimism, while gold ($3,364) and Bitcoin ($96,953) held steady. Upcoming PMI, US-China trade talks, and consumer confidence data will shape the GBP/USD’s path, with the BoE’s hawkish tilt and trade deal providing near-term support.
