The global economy is shaping up in 2025 as governments and markets react to trade wars, political tensions, and stubborn inflation. The British pound has faced fluctuations recently as multiple factors, including Brexit, trade agreements, and dynamic global market trends, have impacted its value. The big question for 2025 is: will the pound strengthen or weaken?
The Pound in 2025: Outlook and Challenges
The pound started 2025 on shaky grounds, influenced by local and international factors. The first two months of 2025 saw the pound struggling against the US dollar and the Euro despite ending 2024 positively. The pound fell to a 14-month low in January, causing market panic. Low market liquidity, weak UK manufacturing data, rising energy prices, and panic in the UK bond market are reasons behind the pound’s shaky start to 2025.
However, data on TradingView shows that the Sterling is making crucial gains against the greenback, driven more by the selling pressure on the former than by a strong economic response from the UK. March and April saw the pound make notable gains, staging multi-day rallies and reaching fresh yearly highs. The GBP/USD trades above 1.34000 for the first time in six months and is up 7.44% year-to-date.
Yet, the economy is not without some serious challenges. The rising tax burden and labour costs could put the economy under more pressure, especially as the US trade tariffs take effect. Although analysts are optimistic about economic growth, the projection is only at 0.8% for 2025 and 2026 (KPMG, UK Economy forecast, April 2025).
What’s Impacting Investor Confidence in the Pound?
One of the key factors influencing investor sentiment on the pound is the ongoing and future trade relationship between the UK and the European Union. Since Brexit in January 2020, the UK has maintained close trading ties with the EU, but investors still await greater clarity on the UK’s trading agreement before making significant investments. A key development is the new entry rules for Europeans coming to the UK, who now require an Electronic Travel Authorisation (ETA) if they don’t have visas.
The global economic outlook is another important factor weighing on investor sentiment. The ongoing US-China trade dispute and rising geopolitical tensions are some of the key events that are influencing global economies. The International Monetary Fund (IMF) warns of a potential slowdown in global growth, which could have a ripple effect on the UK economy.
The UK core inflation slowed down in March, but the Bank of England (BoE) expects inflation to reach 3.7% between July and September, which could be an opportunity to raise interest rates. If that happens, the pound could rally as investors take early bullish positions. This could influence long-term confidence in the pound, especially with the uncertainty in international markets where investors seek safe-haven currencies.
How Global Market Shifts Are Shaping Currency Movements
The global markets play significant roles in shaping currency movements. Emerging markets like China and India are gaining influence, evident in international trade patterns, investment flows, and consumer preferences. The shift towards a multipolar global economy will impact the Sterling and other major currencies.
De-Dollarisation and Widespread Impact
The Chinese renminbi (RMB) is a key currency in 2025, especially since dollar reserves are decreasing in emerging markets, and investors may look elsewhere. The RMB is now included in the IMF’s Special Drawing Rights (SDR) basket thanks to China’s efforts to push the currency for international trade. More countries are showing interest in bypassing the dollar to trade directly with one another or use other currencies. Such moves could gradually erode the dollar’s dominance and have knock-on effects on the pound and other currencies.
Tariffs and Changing Consumer Behaviour
The UK’s reliance on imports, especially for energy, will be important to the pound’s performance in 2025. With £906 billion worth of imports in 2024, tariff hikes could see the UK pay more for imports, thereby increasing inflationary pressure on the pound and affecting consumer behaviour. Although a shift towards local goods may support domestic production, it could reduce consumer spending and not offset the negative impact on overall demand and economic growth.
The UK is working towards new trade agreements with the US, Australia, India, Japan, and the EU to boost trade and security. The promised formal declaration between Britain and the European Union will commit both blocs to “free and open trade” and will be a key post-Brexit event.
Role of the Bank of England (BoE)
The BoE’s May meeting will have currency rates as a significant issue, especially given the impact of dollar rates on the UK’s inflation. The UK’s apex bank will set the tone for investors in the coming months. A hawkish stance could encourage investors’ confidence, while a dovish stance could signal selling pressure. Rate cuts by the US Federal Reserve will also be key in 2025 as the impact on the dollar will influence the pound’s relative value.
GBP/USD Technicals
The GBP holds a winning streak against the USD into the seventh trading day as the RSI suggests a strong bullish momentum. The pair is headed for the three-year high of 1.3430, a strong resistance level. If GBP/USD drops below 1.3300 (20-period SMA, 50-period SMA) and confirms this level as resistance, the next support level could be at 1.3250 (Fibonacci 23.6% retracement level of the latest uptrend) and 1.3200 (static level). The early Asian trading hours on Tuesday saw early sellers push the GBP/USD near 1.3425, but investors await a speech by BoE official Dave Ramsden for a market push.
Will the Pound Remain Stable This Year?
The pound is unlikely to remain the same by December 2025. Tariffs, changing market trends, and potential rate cuts/increases will cause the exchange rate to fluctuate in the coming months. Although the pound looks stable, a dollar resurgence would challenge that stability and open new opportunities for investors.
Article written by Dave Smith
