Sterling bulls drove GBP/USD to a 2025 high of 1.3468 following higher-than-expected UK inflation data, but gains were short-lived. A simultaneous rise in gilt and U.S. Treasury yields has reignited concerns about UK fiscal sustainability, pressuring the pound lower.

This mirrors January 2025, when U.S. yields rose on "Trump trades" amid fears that tariff-driven inflation would boost U.S. interest rates. The higher UST yields lifted gilt yields as well, unsettling investors over the UK's ability to fund deficits and maintain budget discipline.

Wednesday's above-target UK inflation data has revived those fiscal worries and tempered expectations for near-term Bank of England rate cuts. LSEG's IRPR now prices in 37 basis points of BoE cuts by December, versus 50 bps from the Federal Reserve. The narrowing rate differential has tempered GBP/USD downside, for now.

The inflation data also casts a light on deep divisions within the BoE Monetary Policy Committee. Any calls for aggressive easing from the doves might fuel further gilt selling if markets believe the BoE is on the cusp of a significant policy mistake. That in turn would heighten pressure on Prime Minister Keir Starmer's government to address mounting fiscal credibility concerns.

Technically, GBP/USD retains a bullish outlook while above 1.3090, the 50% retracement of the 1.2712–1.3468 move. A drop below 1.3090 would bring the daily Ichimoku cloud top near 1.3000 and the 200-day moving average at 1.2889 into focus.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)