Recently, the pound sterling (GBP) performed well in the foreign exchange market in early 2025, successfully breaking through the highest level in the past two months and attracting widespread market attention. From December 2024 to January 2025, the pound still maintained a relatively stable upward momentum despite the strong US dollar. This round of rise is not only driven by the global economic recovery, but also closely related to the UK’s own economic performance and the market’s expectations for the Bank of England’s (BoE) monetary policy.

This article will analyze the recent rise of the pound from both fundamental and technical perspectives, and explore possible subsequent trends.

Fundamental Analysis: Core Drivers of GBP Rise

UK economic recovery and easing of inflationary pressures

The British economy showed signs of recovery in the second half of 2024. Although the UK's economic growth faces pressure from a global economic slowdown and high internal inflation, the British government and central bank have achieved certain results in stimulating the economy and curbing inflation. The British Consumer Price Index (CPI) showed a gradual downward trend at the end of 2024, making the market optimistic about the outlook for British inflation. The pound rebounded as lower-than-expected inflation data eased concerns about further interest rate hikes by the Bank of England.

The Bank of England’s interest rate hike cycle is expected to end or slow down

The Bank of England has implemented a series of interest rate hikes over the past year to combat high inflation. However, as inflationary pressures ease and economic growth slows, the market generally expects that the Bank of England may gradually end its interest rate hike cycle and even begin to consider cutting interest rates. This change in policy expectations has supported the pound. Investors are seeking relatively high-yielding currencies around the world, and the pound offers relatively high interest rates, attracting large capital inflows and further pushing up the pound exchange rate.

Improvement in global risk sentiment and weakening safe-haven demand for GBP

From the end of 2024 to the beginning of 2025, global risk sentiment will gradually improve, especially the gradual economic recovery of the United States and China, which has brought certain positive expectations to the global economic outlook. In this environment, the market's demand for safe-haven currencies has gradually decreased, and the pound, as one of the risk currencies, has been supported by capital inflows. Especially compared with the US dollar, the British pound is relatively more attractive.

The Weakness of the US Dollar and Global Capital Flows

In 2024, the U.S. dollar began to show a correction after a period of strength, especially as the Federal Reserve's interest rate hike cycle is coming to an end and there are clear signs of global economic recovery, the U.S. dollar's performance has weakened. The U.S. dollar index (DXY) fell back in late 2024, which provided strong support for the pound's rise. While the U.S. dollar is weak, currencies such as the pound and the euro are relatively strong, driving up the exchange rate of the pound.
Political stability and the post-Brexit adjustment period

Since Brexit, although the economy has been hit hard in the short term, the UK has gradually adapted to the new trade and economic structure over time. In 2024, the relative stability of the British political situation also provides confidence to the market. The government's consistency in economic policy and the promotion of reform measures have allowed the pound to regain some support in global markets.

GBP breakout and support levels

From a technical perspective, the pound has experienced a relatively strong upward trend after breaking through the highest point in the past two months. The current GBP/USD exchange rate has exceeded the 1.2600 level and has successfully remained above this high level. The 1.2600 area has become a strong support level in the near future and is also the convergence area of ​​previous highs. If GBP remains above this level in the short-term, further upside could lead to a challenge to resistance at 1.2700 and above.

The 50-day moving average and the 200-day moving average cross

Recently, the pound's 50-day moving average broke above the 200-day moving average, forming a "golden cross" signal, which is usually regarded as a technically bullish signal. The intersection of the 50-day moving average and the 200-day moving average shows a simultaneous rise in the short-term and long-term trends, indicating that the pound may enter a new rising cycle. If the pound can continue to rise above this support, it is expected to further challenge the 1.2500 area and beyond.

RSI and MACD indicators

Judging from the Relative Strength Index (RSI), the pound's current RSI is below 70, indicating that its rise has not yet entered the overbought zone and there is still some room for growth. At the same time, the MACD indicator shows strong buying momentum, and the short-term line (fast line) is above the long-term line (slow line), indicating that the pound's upward momentum is still strong.

Key Resistance Levels and Pullback Risks

Of course, we also need to be wary of the risk of a pullback technically. The 1.2700 area is a key technical resistance level for GBP/USD. If the exchange rate cannot break through this level, it may face some correction pressure. If a pullback occurs, support near 1.2600 will be key, and a break below this level could lead to a deeper correction, with targets likely to fall on support at 1.2500 or lower.

Follow-up trend prediction: The pound is expected to maintain its rise, but it needs to be wary of corrections

Based on the analysis of fundamentals and technical aspects, we can draw the following predictions:

Bullish in the short term, but volatility increases

As the pound's rise is mainly supported by the global economic recovery, easing British inflation and the weakness of the US dollar, the pound is still likely to continue to rise in the short term, especially after breaking through important technical resistance levels and market sentiment becomes more optimistic. However, given the current strong rise in GBP, one also needs to be wary of the risk of a technical pullback, especially around key resistance levels.

It may enter the consolidation stage in the medium term

In the medium term, the pound may face the possibility of some consolidation or shock range, especially after breaking through the 1.2700 level, the market may undergo certain corrections and consolidation. At this time, investors should pay attention to whether the pound can stabilize the support level near 1.2600. If it breaks through this position, a larger correction may occur.

Long term bullish, relying on UK economic growth prospects

In the long term, if the British economy continues to recover in 2025, especially if the labor market and consumer confidence pick up, the pound is likely to maintain its upward trend. More importantly, the Bank of England's policy will play a key role in the long-term trend of sterling. If the Bank of England continues to maintain a relatively high interest rate policy, the pound may continue to attract capital inflows, further supporting its exchange rate gains.

Summarize

The recent surge in the pound reflects the market's optimistic expectations for the UK's economic recovery and the improvement of the global economic environment. Fundamentally, factors such as easing inflation, the end of the interest rate hike cycle, and the weakness of the US dollar have jointly promoted the rise of the pound; technically, the pound has broken through key resistance levels, forming a bullish signal. The subsequent trend may continue to rise, but investors need to be wary of the risk of a correction, especially when the exchange rate approaches the 1.2700 area. Overall, the pound is expected to remain strong in the short term, but may enter a consolidation phase in the medium term. The long term depends on the continued performance of the British economy and the Bank of England's monetary policy decisions.

*Disclaimer: The content of this article is for learning only, does not represent the official position of VSTAR, and cannot be used as investment advice.