Pound to Dollar Forecast: GBP Faces Fragile Recovery Amid Gilt Yield Shock

Published: Thursday, 4 September 2025 08:30 BST - Written by Frank Davies

STORY LINK Pound to Dollar Forecast: GBP Faces Fragile Recovery Amid Gilt Yield Shock

The Pound to Dollar exchange rate (GBP/USD) is holding just above 3-week lows after rebounding to 1.34, but the outlook remains fragile as traders weigh UK bond-market turmoil, looming fiscal risks, and the next moves from the Federal Reserve.

UK gilt yields have eased slightly from 27-year highs, offering temporary relief, yet confidence in the government’s fiscal strategy is shaky ahead of November’s budget.

At the same time, US jobs data and Fed policy expectations keep the dollar outlook in sharp focus, leaving GBP/USD forecasts finely balanced between further weakness and a tentative recovery.

GBP/USD Forecasts: Can the UK Bond Market Stabilise?

After sliding to lows below 1.3350 on Tuesday, the Pound to Dollar (GBP/USD) exchange rate has managed to regain the 1.3400 level, but sentiment remains notably fragile with all eyes on the UK bond market as well as the dollar and wider global market pressures.

There has been some relief in the bond market with the 30-year yield back below 5.70%, although still close to 27-year highs.

UK equity markets have also managed to secure gains on Wednesday.

Bond markets will be watched very closely while the US labour-market data will also be a key influence this week.

UoB commented; “While the sharp drop appears excessive, there is room for GBP to weaken further to 1.3305, potentially testing the significant support level near 1.3270. This time around, to sustain the downward momentum, GBP must hold below 1.3490.

According to Scotiabank; “the latest price action is suggestive of support, stabilization, and possible recovery.

It added; “We see the potential for gains back toward the 50 day MA (1.3488) and look to a near-term range bound between 1.3350 support and 1.3450 resistance.”

National Australia Bank head of FX research Ray Attrill noted that bond-market pressures are global and not isolated within the UK.

He did, however, note UK vulnerability; "It's probably resonating a bit more in the UK because of memories of the Liz Truss episode. I think part of the concern is that there's an autumn statement or a budget that's coming up."

Attrill added; "I think at this stage, there's a lack of confidence in markets that the government is willing to address effectively the scale of the budget deficit and the speed of debt buildup."

Chancellor Reeves announced that the budget will be on November 26th.

MUFG noted that a record GBP14bn was raised in the latest 10-year Gilt syndication and added; “investors may be viewing these higher yields as attractive levels to buy.”

The bank is still cautious over the Pound outlook; “While we do not expect any crisis-type scenario in the UK, the risks from fiscal uncertainty will persist into the budget later in the year.”

Investment banks are still wary over the dollar outlook despite gains on Tuesday.

ING commented; “Rising debt concerns outside the US may have triggered some unwinding of abundant USD shorts. Still, we doubt this will provide sustainable support to the dollar ahead of key data releases and imminent Fed easing.”

Danske Bank sees limited scope for further near-term dollar selling; “Looking ahead, with roughly 90% probability priced for a 25bp Sept Fed cut, we see limited room for further downside in front-end US yields barring a major miss in Friday's NFP report. Instead, we think risks remain tilted toward a hawkish market reaction in the weeks ahead, implying further scope for USD strength.”

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TAGS: Pound Dollar Forecasts