GBP/USD’s recovery momentum is showing signs of slowing as the U.S. dollar continues to maintain its advantage amid cautious market sentiment over geopolitical risks, persistent inflation pressures, and a relatively resilient U.S. economy. Meanwhile, the British pound still lacks a clear domestic catalyst to sustain its upward momentum.
Most recently, the U.S. ISM Manufacturing PMI for May rose to 54.0 from 52.7 in the previous month, beating market expectations and marking the strongest expansion in the manufacturing sector in around four years.
This suggests that U.S. manufacturing activity continues to maintain positive momentum.
In addition, construction spending increased by 0.4%, exceeding expectations, further reinforcing the view that the U.S. economy has yet to show clear signs of weakness.
Notably, with inflation risks still present, especially as energy prices and transportation costs remain exposed to geopolitical uncertainty, markets may continue to limit expectations for the Fed to shift quickly toward a more aggressive easing stance. This helps the U.S. dollar maintain a supportive foundation in the near term, particularly against currencies that lack strong upside catalysts, such as the British pound.
On the UK side, recent economic data have not provided enough support for the pound. UK CPI eased to 2.8% year-on-year in April, down from 3.3% in the previous month, while core inflation fell from 3.1% to 2.5% and services inflation declined from 4.5% to 3.2%. The cooling in price pressures may help ease medium-term inflation concerns, but it also weakens expectations that the Bank of England needs to maintain an overly hawkish stance. As a result, the impact on the pound is not entirely positive, especially as markets continue to look for further evidence that the UK economy is strong enough to support sterling.
Meanwhile, the UK labour market has also shown less positive signals. According to the ONS, the number of payrolled employees fell by around 100,000 month-on-month in April and by 210,000 compared with the same period last year, to around 30.2 million. However, the ONS also noted that this remains a preliminary estimate and may be revised when more data become available. Even so, the figures suggest that the UK labour market is cooling, limiting the pound’s ability to sustain a stronger recovery without additional supportive data.
That said, the BoE is still unlikely to shift toward an overly dovish stance, as inflation risks have not fully disappeared. Governor Andrew Bailey said the BoE is monitoring public-sector wage developments more closely, with public-sector pay rising 4.8% year-on-year in the first quarter, compared with 3.0% in the private sector. This indicates that although inflation pressures in the UK have eased, there are still areas that require caution, especially if energy costs and wages continue to put pressure on prices.
Overall, GBP/USD is currently being driven by the combination of a stronger U.S. dollar and a mixed UK economic picture. Positive U.S. data help reinforce expectations that the Fed will remain cautious, while UK data have not been strong enough to provide clear support for the pound. Therefore, GBP/USD’s recovery momentum appears to be slowing in the near term, and the pair may continue to trade cautiously until markets receive clearer signals from inflation data, labor market figures, and the policy direction of both the Fed and the BoE.
In the near term, the area around 1.3500 will be a key level to watch, as this was where the previous recovery attempt in GBP/USD was capped. If the pair continues to fail to break above this area, corrective pressure could return. Conversely, a clear breakout above 1.3500 could open the way for GBP/USD to extend its recovery.
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