Pound to Dollar FX Forecast: Sterling Eyes 3-Year Best as US Loses AAA Rating

May 19, 2025 - Written by David Woodsmith

STORY LINK Pound to Dollar FX Forecast: Sterling Eyes 3-Year Best as US Loses AAA Rating

The Pound to Dollar rate dipped below 1.3300 late last week, but posted strong gains on Monday.

The dollar was subjected to renewed selling after a credit-rating downgrade with USD/JPY back below 145.00 while Treasuries lost further ground. The Pound was also boosted by evidence of a UK-EU deal.

GBP/USD surged to 1.3370 with traders looking to attack crucial long-term resistance around 1.3450.

UoB considers that a break above 1.3385 is needed to bring the 1.3450 target in focus.

Overall confidence in the dollar remains notably fragile. A rating downgrade in isolation could have limited impact, but the problem for the dollar is that it comes at a time when wider confidence in the bond market and currency has stumbled.

The US Administration is attempting to pass a budget bill which would widen the deficit further and trigger a further sustained debt increase. There is also speculation that an element of any forthcoming trade deals will be a weaker dollar against Asian currencies.

According to ING; “The link between US sovereign risk, Treasuries, and the dollar is one of capital flight. Are global investors shifting their portfolios away from the US?”


In this context, markets remain very sensitive to adverse developments.

Late on Friday, Moody’s cut the US credit rating from 'AAA' to 'Aa1. This removed the last AAA US rating.

According to Moody’s; “The downgrade reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”

It added; “While we recognise the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.”

Danske Bank commented; “This move underscores the grim US fiscal outlook and highlights the absence of political willingness in Washington to tackle the issue.”

According to HSBC head of FX research Paul Mackel; "While the decision itself is seen as a catch-up to S&P's move on 5 August 2011 and Fitch's announcement to do the same on 1 August 2023, Moody's decision could still feed USD bears."

He added; "Given this rating erosion has been slow moving, the simple takeaway is Moody's step should not matter for the USD. But one needs to be careful with this assumption."


Other analysts were more confident that the impact would be limited.

According to National Australia Bank (NAB)’s Ray Attrill; "Moody's actions will have zero impact on any investor's ability or willingness to continue holding US Treasuries -- that would likely require downgrades of four or five more notches."

Markets, however, are also focussing on trade developments amid uncertainty surrounding the potential for deals with major trading partners.

Japan stated that any tariffs on car exports to the US were unacceptable, raising major doubts over any near-term deal, but there was some talk that progress was being made with the EU.

According to NAB’s Attrill "there's a lot of complacency about the ability to pull off deals. Confidence that the U.S. economy is going to weather this is very much open to question."

Dollar policy will also be important during the week with the US and Japan due to meet later in the week.

Nomura International head of G10 spot trading Antony Foster commented; “We have seen hedge fund and also longer-term names selling dollar-yen and other yen crosses. Speculation that Japan might also come under pressure to strengthen their currency has brought yen buyers back to the table.”

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TAGS: Pound Dollar Forecasts