Pound Sterling to Dollar Forecast: GBP Breaks 1.36 as Fed Sparks USD Volatility

Modified: Thursday, 18 September 2025 09:45 BST - Written by David Woodsmith

STORY LINK Pound Sterling to Dollar Forecast: GBP Breaks 1.36 as Fed Sparks USD Volatility

The Pound to Dollar exchange rate (GBP/USD) surged to 11-week highs at 1.3670 on Tuesday as markets positioned ahead of the Federal Reserve’s policy decision.

Pound Sterling briefly eased to 1.3635 on Wednesday but crucially broke above the 1.3590/1.3600 zone, a level analysts say could now act as firm support.

According to ING;

“We think the dollar will be the dominant FX theme, and GBP/USD should find support near 1.3600 before being dragged above 1.37.”

UoB added;

“Although overbought, the advance has scope to extend to 1.3700, but this time around, based on the current momentum, a sustained rise above this level is unlikely. The next major resistance at 1.3765 is also unlikely to come into view.”

Sterling has also been underpinned by favourable yield spreads and optimism around inward investment flows, offsetting some concern over reports that the Office for Budget Responsibility (OBR) will downgrade UK productivity estimates — a move that would weaken growth forecasts and lift borrowing projections.

The Federal Reserve cut rates by 25bp to 4.00–4.25% as expected, with newly appointed board member Miran the lone dissenter voting for a deeper 50bp reduction.

Barclays Research noted;

“The dot plot showed a lower rate path than in June – with three 25bp cuts this year, one in 2026 and one in 2027, despite lower unemployment projections and higher GDP and inflation forecasts into next year. The outcome of the Fed meeting was largely as Barclays Research had expected; however, Powell was somewhat hawkish in his statement, characterising the rate cut as a ‘risk-management cut’ and emphasising the uncertainty in the dot plot.”

They added;

“The dollar initially sold off on the decision, with EUR/USD reaching highs of 1.1919, as markets interpreted the cut as a signal for further dollar weakness. However, the selloff in USD was more than reversed during Powell’s hawkish statement, with DXY trading ~0.7% higher than Tuesday morning.”

MUFG had flagged the risk of disappointment without a bigger move;
“Any sense of a 50bp cut is the downside risk for front-end rates and the dollar. Without that, the dollar sell-off into the meeting could mean there’s a relief rally if the prospect of a 50bp cut is an idea that Powell is more clearly dismissive of.”

ING expects dollar rallies to prove temporary;
“Today should confirm that the Fed is embarking on a 125bp easing cycle. We would see any upside spike in the dollar as temporary and corrective.”

BoE in Focus Next

Attention now turns to Thursday’s Bank of England decision. UK inflation data had little impact, with headline CPI steady at 3.8% in August and core easing slightly to 3.6%.

Premier Miton fund manager Emma Mogford said;

“In line inflation print is unlikely to move the needle on the BoE’s interest rates decision tomorrow.”

Deutsche Bank’s Sanjay Raja expects no policy change but highlighted the importance of guidance;

“There are three paths here the MPC can take: one, stick to its current guidance of ‘gradual and careful’ rate cuts, two, tweak its current guidance to ‘gradual and cautious’ rate cuts, or three, simply, drop the current guidance entirely. We place a 40/20/40 probability for each of the three paths.”

Barclays Research also weighed in;

“Focus turns to the Bank of England meeting at 12pm BST, where the MPC is largely expected to hold rates at 4.0%. Barclays Research expect a 8-1 vote split, with Taylor likely dissenting in favour of a 25bp cut, and the minutes will likely display divergent views – with members like Taylor favouring a faster pace of cuts, while Mann may favour a more persistent hold to rates than the ‘gradual and careful’ guidance implies.”

On quantitative tightening, Barclays added;

“Focus will also turn to the decision surrounding the pace of quantitative tightening, and Barclays Research expect the pace of QT to be slowed to £75-80bn in the coming year, amid concerns that long-end gilt sales by the BoE are worsening volatility.”

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TAGS: Pound Dollar Forecasts