**GBP/USD Forecast: Pound Near 1.35 as Inflation Risks Mount and Dollar Weakens**
*By Skerdian Meta, FXLeaders.com*
As financial markets absorb the latest economic data and anticipate central bank decisions, the GBP/USD pair has been a focal point for traders in 2025. The pound sterling has rallied close to the 1.35 threshold against the US dollar, spurred by diverging economic conditions, shifting monetary policy signals, and surging inflation in the United Kingdom. Meanwhile, the greenback faces renewed selling pressure as US economic momentum moderates and expectations for Federal Reserve easing rise.
This detailed forecast analyzes the drivers behind GBP/USD’s recent moves, underlying macroeconomic themes, and what traders should watch in the weeks ahead.
## Current GBP/USD Landscape
The GBP/USD currency pair has climbed near 1.35, recouping losses from late 2024 as the UK economy demonstrates resilience and the US dollar loses its safe-haven appeal. As of early October 2025, the landscape presents a set of intertwined factors, both domestic and international, steering the exchange rate dynamic:
– UK inflation remains stubbornly above the Bank of England’s target, raising expectations of further monetary tightening.
– US growth indicators have cooled, prompting speculation of a dovish turn by the Federal Reserve.
– Geopolitical factors and risk sentiment continue to impact demand for both sterling and the dollar.
Currency traders and investors are analyzing incoming data for clues about the next moves in monetary policy, while monitoring global trade and political developments that could swing market sentiment abruptly.
## Inflation Pressures Persist in the UK
One of the dominant themes lifting the pound has been persistently high inflation in the United Kingdom. Inflationary pressures have outpaced expectations, fueled by both domestic and external factors.
**Contributors to UK inflation:**
– Rising energy costs, particularly natural gas and electricity, driven by ongoing supply-chain disruptions in Europe.
– Labor shortages, which are pushing up wages across several key sectors.
– Elevated food prices, reflecting both global commodity trends and post-Brexit trade frictions.
– Robust consumer demand, supported by steady wage growth and low unemployment.
August and September consumer price index (CPI) data show inflation at 4.8 percent year-on-year, significantly above the Bank of England’s 2 percent target. Producer price inflation also remains elevated, increasing cost pressures for businesses.
This acute inflation problem has forced the Bank of England to maintain a tightening bias, even as growth prospects moderate. Rate hikes and hawkish forward guidance lend support to the pound, as investors anticipate higher yields on sterling-denominated assets.
## Monetary Policy: Bank of England vs. Federal Reserve
Central bank decisions and forward guidance are among the most important catalysts for the GBP/USD currency pair. The current divergence between the Bank of England and the Federal Reserve is a key reason for sterling’s recent strength and the dollar’s weakness.
**Bank of England Outlook:**
– Policymakers have raised rates several times in 2025, moving the benchmark rate to 6 percent.
– Official statements signal a willingness to hike further if inflation does not retreat toward target.
– The monetary policy committee remains vigilant, hinting at possible rate hikes in December or Q1 2026.
– The majority of committee members favor tightening, though some have voiced concerns over economic growth.
**Federal Reserve Outlook:**
– The US central bank has held rates steady at 5.25 percent in its last two meetings.
– Forward guidance has shifted to a more accommodative tone as GDP growth and labor market indicators soften.
– Markets are pricing in the first rate cut as early as March 2026.
– Several Fed officials have acknowledged downside risks and rising slack in the labor market.
The policy gap between the Bank of England and the Fed has widened, improving the relative attractiveness of the pound for yield-seeking investors. Moreover, with UK inflation still running hot, the central bank’s more haw
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