Currency Markets in Turmoil
The GBP/USD exchange rate has plummeted to a three-week low of 1.3450, shattering key psychological support levels. This downturn follows the imposition of sweeping 30% tariffs on the EU and Mexico by U.S. President Donald Trump, which has escalated global trade tensions and led to a rally in the U.S. Dollar (USD).
Trump Tariffs and Their Impact
The breakdown of trade talks after a 90-day suspension period has triggered a safe-haven flow into the USD, intensifying the sell-off in GBP/USD. The UK economy’s contraction by 0.1% in Q2, which was below market expectations of 0.1% growth, has further weakened the GBP. This marks the second consecutive quarterly contraction, signaling a technical recession.
Weakening UK Economy and Its Effects
The pressure is mounting on the Bank of England (BoE) to pivot toward rate cuts, with markets now pricing a 65% probability of a cut before October. This has driven rate differentials further in favor of the USD. The UK’s inflation picture remains subdued, with the upcoming UK CPI release expected to reflect weak domestic consumption, raising the odds of BoE dovishness.
CPI Surprises and Dovish Fed Commentary
The upcoming U.S. CPI release is expected to show inflation rising from 2.4% to 2.7% YoY, with core CPI forecast at 3.0%, up from 2.8%. These figures would validate tariff-driven price pass-through to consumers and potentially delay rate cuts by the Federal Reserve. Meanwhile, Fed speakers have tilted dovish, hinting at two possible rate cuts by year-end, though a hot CPI print would challenge that outlook.
Technical Breakdown and Market Sentiment
GBP/USD has cracked decisively beneath 1.3500 and the 50-day SMA at 1.3495, which had been a strong support line. Momentum has now turned strongly bearish, with RSI entering oversold territory. Bears are eyeing a retest of 1.3400 and possibly a move toward the June 23 low of 1.3369.
Currency Heatmap and Macro Divergence
On a monthly basis, the British Pound (GBP) has weakened against all major currencies except the Japanese Yen, down 2.12% vs USD, 1.23% vs EUR, and 1.56% vs CHF. This reflects a broad reallocation away from UK assets amid signs of stagnation. The U.S. Dollar Index (DXY) has seen consistent higher-lows since the start of Q3, building toward a breakout above the 99.39 resistance level if CPI comes in hotter than expected.
Verdict and Trading Outlook
The path of least resistance for GBP/USD remains lower, with clear momentum breaches, fundamental underperformance from the UK, and a USD supported by tariffs and CPI inflation. Bearish setups remain intact below 1.3500, and targets at 1.3400 and 1.3369 remain in play. Traders should continue favoring downside bias with volatility expected to rise sharply post-CPI.
Conclusion
In conclusion, the GBP/USD exchange rate has experienced a significant downturn due to the imposition of tariffs by the U.S. and the UK’s weakening economy. The upcoming CPI release is expected to further impact the market, potentially leading to a delay in rate cuts by the Federal Reserve. With the USD gaining strength and the GBP weakening, traders should continue to favor a downside bias, with targets at 1.3400 and 1.3369 remaining in play. As the market continues to navigate through these turbulent times, it is essential to stay informed and adapt to the changing market conditions.
