Pound to Dollar Forecast: GBP Dips as UK Inflation May Have "Peaked"

Modified: Wednesday, 22 October 2025 08:30 BST - Written by Toni Johnson

STORY LINK Pound to Dollar Forecast: GBP Dips as UK Inflation May Have "Peaked"

The Pound to Dollar exchange rate (GBP/USD) slumped to lows of $1.332 on Wednesday after the latest ONS data release had economists suggesting UK inflation may have now "peaked".

In a post-CPI report, economists at ING said, "Altogether, at 3.8%, it looks like UK inflation has peaked. We see it at 3.5% over the remaining months of 2025, before dipping back from January. This latest data, combined with better news on wage growth, brings another rate cut this year firmly back into play."

GBP was unable to advance above 1.3450 on Monday and dipped to lows just below 1.3370 before settling around 1.3385.

The dollar posted net gains ahead of the New York open, although it struggled to extend the gains amid a retreat in US yields.

UoB commented; “While upward momentum has slowed, there is still a chance for GBP to break clearly above 1.3475, provided that it holds above the ‘strong support’ at 1.3360.”

Earlier, the UK reported a government borrowing requirement of £20bn for September from £18.6bn the previous year and the widest deficit for five years.

For the first half of fiscal 2025/26, the deficit increased to £99.8bn from £88.3bn in the same 2024/25 period.

Debt interest payments increased on the month and there was also an increase in government spending which offer higher tax revenues.

The data reinforced expectations that Chancellor Reeves would have to increase taxes in the November budget to close the fiscal gap.

PwC UK economist Nabil Taleb commented; “An expected downgrade to the OBR’s long-term growth forecasts will only add to the squeeze. Despite ruling out another £40bn tax grab, fresh tax rises and spending cuts now look unavoidable as she tries to rebuild her £10bn buffer.”

Market sentiment and bond-market moves will be a crucial element and the 10-year yield has settled just below 4.50%, but sentiment remains fragile.

According to Guy Miller, chief market strategist, Zurich Insurance Group; "The UK government is in an unenviable position. And we know that, and investors know that. And we know that tax has to change and be moved up. That's been factored in."

He added; "I wanted them to do this as quickly and as clinically as they could because it just removes that uncertainty. There's no reason to prolong it because the market's already pricing it.”

Markets remain extremely confident that the Federal Reserve will cut interest rates by 25 basis points next week despite the shortage of official data.

Rabobank commented; “The FOMC will get the CPI report for September before the October meeting, but probably not the official Employment Report. Nevertheless, another rate cut in October seems likely. With no convincing evidence available that could make them either skip October or make a larger cut in October, the FOMC is on auto-pilot.”

There is, however, the possibility that there will be greater doubts surrounding another rate cut in December which would underpin the dollar.

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TAGS: Pound Dollar Forecasts