The British Pound May Drive the U.S. Dollar Lower After U.K. CPI Report
The British Pound May Drive the U.S. Dollar Lower After U.K. CPI Report
By:Ilya Spivak
Is the British pound gearing up for another big push against the U.S. dollar?
- The U.S. dollar is under fire so far in 2025 amid economic slowdown worries.
- The euro is outperforming amid European defense buildout speculation.
- U.K. CPI data may help the British pound find fuel for catch-up gains.
The U.S. dollar has had a rough start to the year in the first quarter of 2025. The currency is trading down 3.3% against an average of its major counterparts. The move has echoed falling Treasury bond yields amid concern that slowing economic growth will beckon the Federal Reserve to cut interest rates sooner and deeper than previously expected.
Benchmark Fed Funds futures are now pricing in 91 basis points (bps) in rate cuts through the end of 2026. That is up from 62bps at the start of 2025 and as low as 42bps so far this year. A sense of urgency has also appeared in the anticipated timeline, with most of the cuts to be made this year.
U.S. dollar down as markets fret about economic growth
That has eroded the greenback’s yield advantage against other currencies, leading them to reprice higher. The euro has narrowly outperformed, adding as much as 7% so far this year amid speculation that a big-splash defense spending spree will stoke growth and inflation, keeping a lid on European Central Bank (ECB) rate cuts.
The British pound has lagged behind its Continental counterpart, rising as much as 5.2% from the start of 2025 to the year-to-date high last week. Interestingly, that happened despite a shift in priced-in policy expectations that now have a higher central bank interest rate target in the U.K. (3.92%) than in the U.S. (3.69%) by year-end.
Will U.K. inflation data boost the British pound?
Incoming U.K. inflation data may help force a rethinking. The headline consumer price index (CPI) is expected to have risen 2.9% year-on-year in February, a slight downtick from a 10-month high at 3% in January. The core CPI measure is penciled in at 3.6%, down from 3.7% but still matching the second-highest setting since April of last year.
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The Bank of England (BOE) struck a mildly hawkish tone last week with its policy update (as expected). The minority favoring the restart of interest rate cuts unexpectedly shrank to just one vote on the steering Monetary Policy Committee (MPC). Meanwhile, purchasing managers’ index (PMI) data points to quickening economic activity growth.
On balance, this suggests a slight cooldown of price pressure is unlikely to inspire a dovish rethink of monetary policy projections. As it stands, traders have priced in 53bps in rate cuts through the end of next year. The British pound may rise against the U.S. dollar if the CPI report keeps this baseline broadly intact.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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