Forex Analysis & Reviews: 22.05.2025 - GBP/USD. Inflation, Road...

22.05.2025 11:58 AM

GBP/USD. Inflation, Road Tax, and the Outlook for a Northern Trend

The pound, paired with the dollar, reached a new three-year high yesterday, peaking at 1.3467. This price action was driven not only by general weakness in the U.S. dollar but also by strength in the pound, which reacted to the UK's CPI report released the same day. The release exceeded even the most optimistic forecasts, reflecting accelerating inflation—every component of the report came in positive, significantly beating expectations.

For example, the monthly Consumer Price Index surged to 1.2% in April after falling to 0.3% the previous month (forecast: 1.1%)—marking the fastest pace of growth since April 2023. On a year-over-year basis, the headline CPI rose to 3.5% from 2.6%, whereas most analysts had expected a more modest increase to 3.2%. This is also a multi-month record—the highest since January of last year.

The core CPI also entered the "green zone." After declining for the previous two months and reaching 3.4% in March, it accelerated to 3.8% in April—the highest since April 2024.

Retail Price Index (RPI), which is closely monitored in wage negotiations, also jumped significantly. Month-over-month, the RPI surged to 1.8% (up from just 0.3% previously)—the fastest growth rate since October 2022. On a yearly basis, after two months of decline (down to 3.2%), it jumped to 4.5%—its highest level since February of last year.

April's data also showed a spike in service-sector inflation, which rose to 5.4% from 4.7% the previous month.

On one hand, such a sharp rise in inflation increases the likelihood that the Bank of England will refrain from further monetary easing. This suggests that the BoE may adopt a wait-and-see approach not only at the June meeting (a largely priced-in scenario) but also in August. Especially since the UK economy is in relatively good shape: in Q1 2024, GDP rose by 0.7% quarter-over-quarter after minimal growth of 0.1% in Q4 2023 (the forecast was 0.5%). Year-over-year, the economy expanded by 1.3% (vs. a forecast of 1.2%).

On the other hand, the significance of yesterday's inflation report should not be exaggerated. More precisely, one should avoid drawing hasty conclusions based on a single report. April's inflation spike is largely attributed to an increase in the UK's Vehicle Excise Duty (VED). As of April 1, major changes to the VED came into effect, affecting both traditional internal combustion engine vehicles and electric cars (which had previously been exempt). Additionally, owners of vehicles valued over £40,000 are now subject to an extra surcharge.

According to analysts, the impact of this tax change will be reflected in inflation data for several months, possibly up to a year. However, the peak impact is expected in April–May, as many drivers choose to pay VED annually to avoid extra fees (most other payment options incur additional charges).

Therefore, April's inflation data should be viewed through this lens. Especially since other components of the report—such as healthcare, rent, and dining—showed declines.

Outlook and Market Sentiment

In my view, GBP/USD traders will quickly price in yesterday's inflation data, given its distorted nature. The situation needs to be monitored in dynamics. That's likely why buyers failed to hold above 1.3450, pulling back to the lower 1.34 range. The future of the bullish trend is now in the hands of the greenback, which has paused its decline. Yesterday, the U.S. Dollar Index hit a two-week low at 99.20, but the downward momentum slowed today. Major dollar pairs, including GBP/USD, reacted accordingly.

All of this suggests that both buying and selling the pair at this stage appears risky. The dollar remains vulnerable amid growing pessimism over U.S.–China (and U.S.–EU) trade talks, so short positions on GBP/USD should be avoided. Long positions, however, will become relevant only if buyers manage to break through the 1.3450 resistance level (the upper Bollinger Band on the D1 timeframe). As we can see, even during the bullish impulse, GBP/USD bulls could not overcome this barrier. But if the next attempt to break through is successful (i.e., if the dollar index resumes its decline), long positions will again be justified. The target for the northern movement is 1.3520—the upper Bollinger Band on the W1 (weekly) chart.

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*El análisis de mercado publicado aquí tiene la finalidad de incrementar su conocimiento, más no darle instrucciones para realizar una operación.

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Fundamental analysis

Irina Manzenko,
Experto analítico de InstaForex
© 2007-2025

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