The British pound (GBP) found itself under pressure on Thursday, August 21, 2025, as the GBP/USD exchange rate slipped to around 1.3450 during the Asian trading session. This movement came as investors digested a mix of fresh inflation data from the UK and shifting expectations for interest rate decisions on both sides of the Atlantic. According to FXStreet, the pound's dip was largely attributed to a modest recovery in the US dollar (USD), as traders weighed the likelihood of an imminent Federal Reserve rate cut and braced for new economic signals from both the UK and the US.
Market participants were especially attentive ahead of the preliminary release of the S&P Global Purchasing Managers' Index (PMI) for August, scheduled for later that same Thursday. The PMI is closely watched as a barometer of economic health, with readings from both the UK and the US potentially setting the tone for currency markets in the near term. But even before those numbers hit the wires, attention was already shifting to the highly anticipated Federal Reserve annual symposium at Jackson Hole, slated for Friday, August 22. Many traders and analysts, as reported by FXStreet, expected Federal Reserve Chair Jerome Powell's remarks to provide crucial guidance on the central bank's next moves—especially regarding the prospect of a rate cut in September.
According to the CME FedWatch tool, the probability of a US Federal Reserve interest rate cut in September stood at nearly 80%, with markets pricing in a total reduction of 52 basis points for the remainder of 2025. Despite these expectations, the US dollar managed a slight rebound, applying downward pressure on the pound and prompting investors to reassess their positions ahead of the Fed's policy signals.
Yet, it was the UK inflation data that truly grabbed headlines this week. On Wednesday, August 20, the UK Office for National Statistics reported that headline Consumer Price Index (CPI) inflation rose to 3.8% year-on-year in July 2025, marking the highest level since early 2024. This figure surpassed both the 3.6% recorded in June and the market consensus of 3.7% predicted by Reuters surveys. Core CPI—which strips out volatile items like food and energy—also climbed to 3.8% in July, again beating expectations.
Grant Fitzner, Chief Economist at the UK Office for National Statistics, commented on the data release, stating, "The inflation increase pushed the UK CPI to its highest level since early 2024." He attributed much of the July surge to a sharp rise in airfares, which saw their biggest jump in July since the method for recording flight prices changed from quarterly to monthly back in 2001. "This increase may be due to the timing of school holidays this year," Fitzner explained. He also pointed out that, "Petrol and diesel prices rose this month, compared to a fall at this time last year. Food prices continued to increase, with items such as coffee, fresh orange juice, meat, and chocolate recording the largest rises."
Despite the inflationary spike, the pound proved relatively resilient after the data release, trading at 1.3489 against the US dollar. However, the overall trajectory for the currency remained uncertain, with markets keenly aware that stubbornly high inflation could delay any move by the Bank of England (BoE) to cut interest rates. As FXStreet noted, investors now expect a longer wait for the next BoE rate cut, with a 25 basis point reduction not fully priced in until March 2026. Earlier in August, the likelihood of a rate cut before the end of 2025 was considered much higher, according to Reuters.
The BoE’s monetary policy decisions are fundamentally driven by its mandate to maintain price stability, aiming for an inflation target of around 2%. When inflation runs hot, as it has in recent months, the central bank typically leans towards higher interest rates to cool the economy and anchor expectations. Conversely, if inflation falls too low—often a sign of flagging economic growth—the BoE might lower rates to stimulate borrowing and investment.
Recent BoE meetings have reflected this balancing act. Earlier this month, the central bank narrowly voted to cut its base rate from 4.25% to 4%, signaling a cautious approach to monetary easing. According to Tinnhanhchungkhoan, the decision factored in three key concerns: persistent inflation, a cooling labor market, and sluggish—though modestly improving—economic growth. The latest GDP data, released the previous week, showed the UK economy unexpectedly grew by 0.3% in the second quarter of 2025, offering a glimmer of optimism amid broader uncertainty.
Looking ahead, forecasts suggest inflationary pressures may soon peak. The UK CPI is expected to reach 4% in September 2025 before gradually declining in the first half of 2026. Deutsche Bank’s Senior Economist Sanjay Raja told Tinnhanhchungkhoan, "We forecast price pressures will ease in Q4 2025, but will come closer to 3.5% year-on-year by the end of the year." Raja added, "We expect price pressures to ease further next year. According to our models, headline CPI will fall to just about 2.75% year-on-year by Q2 2026, before reaching nearly 2.25% by Q4 2026. Overall, we see the path to 2% inflation next year narrowing, and in fact, we see more upside risks building around our forecasts."
UK Finance Minister Rachel Reeves also weighed in following the latest inflation data, emphasizing the government’s ongoing efforts to address the cost-of-living squeeze. Reeves stated, "We have made the necessary decisions to stabilize public finances, and we are far from the double-digit inflation of the previous government, but there is still much work to be done." Her remarks underscored the political and economic significance of bringing inflation back towards target, with household budgets and business sentiment both closely tied to the path of prices and interest rates.
The pound’s journey doesn’t stop with inflation and interest rates. As one of the world’s oldest and most traded currencies, the GBP accounts for 12% of global foreign exchange activity, with the GBP/USD pair—often nicknamed the "cable"—representing 11% of total FX volume, according to FXStreet. The currency’s value is sensitive not only to domestic economic indicators like GDP, PMI, and employment, but also to the UK’s trade balance. A positive trade balance, where exports outpace imports, typically supports the pound, while persistent deficits can weigh on its value.
With the global economy still navigating the aftershocks of the pandemic, geopolitical tensions, and shifting monetary policies, the outlook for the pound remains as complex as ever. Investors and policymakers alike will be watching closely for signals from the Federal Reserve at Jackson Hole, upcoming PMI data, and the next moves from the Bank of England. One thing’s for sure: the interplay between inflation, interest rates, and economic growth will keep the GBP/USD pair firmly in the spotlight for months to come.
As the summer draws to a close and central banks prepare for pivotal decisions, the pound’s recent turbulence serves as a reminder that in the world of currency markets, even small shifts in data or policy can have outsized effects. For now, all eyes are on the numbers—and on the policymakers tasked with steering the ship through uncertain waters.
