06.05.202500:50 Forex Analysis & Reviews: GBP/USD. The Pound and Politics

The pound rebounded on Monday after a prolonged three-day decline last week. It initially weakened in response to the local election results, where Nigel Farage's Reform UK party dealt a significant blow to both the Conservatives and Labour. Additionally, the GBP/USD pair declined amid a general strengthening of the U.S. dollar, which shrugged off signs of an economic slowdown. Solid April Nonfarm Payrolls and conciliatory comments from Donald Trump toward China allowed GBP/USD bears to push the pair to a weekly low.

However, buyers regained the initiative on Monday, pushing the pair back into the 1.33 range.

This week, traders will focus on the Federal Reserve (whose meeting concludes on May 7) and the Bank of England (which will announce its decision the following day). External fundamental factors could also spark volatility—particularly if U.S. and Chinese officials do indeed return to the negotiating table.

As we can see, the pound quickly shook off the political victory of Nigel Farage. While he dominated many constituencies and effectively "tamed" the two major parties that have dominated UK politics for centuries, the market response was restrained. Reform UK gained more seats on local councils than any other party. This unexpected outcome prompted some respected outlets (such as Politico and The Economist) to suggest that Farage could eventually become Prime Minister—a scenario they now argue "can no longer be dismissed as political fiction."

Despite such sensational headlines, the GBP/USD pair only fell by a few dozen points. Market participants were in no hurry to draw conclusions—and rightly so. First, despite its success in council elections, Reform UK only won two of the six mayoral races last week. Second, the next general election isn't scheduled until 2029, making the idea of a Farage premiership too distant and speculative. Third, Reform UK lacks experience in real administrative governance; if Farage's allies struggle in their new roles, it could discredit the entire movement.

In other words, Farage's surprise success is a warning sign, especially considering the global rise of right-wing populism (Trump in the U.S., Le Pen in France, the Freedom Party in Austria, AfD in Germany). But for now, the UK's political landscape is unlikely to shift—at least not at the parliamentary level.

That's why the pound found support on Monday, especially amid a weakening U.S. dollar. The dollar index is retreating toward the 99.00 level, reflecting a lack of economic data and anticipation ahead of the Fed's May meeting on Wednesday. The Fed is expected to keep all policy parameters unchanged, likely citing rising inflation expectations (which, according to the University of Michigan, reached 6.5%—the highest since 1981). Meanwhile, the BoE is expected to take another step toward policy easing by cutting its rate by 25 basis points on Thursday.

Both scenarios have already been priced in, so traders are primarily interested in the outlook ahead. Most economists surveyed by Reuters expect the Fed to lower rates twice—by 25 points each—in September and December. Similar expectations apply to the BOE, with the added likelihood of another cut this month.

In the lead-up to the central bank meetings, GBP/USD traders avoid large positions in favor of the pound or the dollar. Farage's political factor helped sellers push the pair to the mid-1.32s, but profits were locked in near the lower bound of the 1.3250–1.3350 range. On Monday, buyers retested the upper bound but couldn't break through, especially after the ISM services index in the U.S. beat expectations by rising to 51.6 (vs. a forecast of 50.2).

In my view, given the continued uncertainty (Fed and BoE meetings, potential U.S.-China trade talks), GBP/USD will likely keep trading within this range. Over the past three weeks, buyers have tried several times to push the pair into the 1.34 area but were always pulled back into the 1.3250–1.3350 corridor—a sort of holding zone ahead of this week's major events.