GBP/USD eases from three-year high as US Dollar steadies on trade hopes

• The British Pound slips from a three-year high amid a modest rebound in the US Dollar. 
• GBP/USD trades near 1.3500, down nearly 0.50% on the day.
• The UK's stronger-than-expected inflation data from last week trims bets on rate cuts.

The British Pound (GBP) edges lower against the US Dollar, retreating from a three-year high, with the GBP/USD pair trading around 1.3510 during the American session on Tuesday.

The mild correction in spot prices comes as the US Dollar found footing on renewed trade optimism between the US and the EU. Hopes of a breakthrough in tariff negotiations between Washington and Brussels have lifted risk sentiment, lending modest support to the Greenback after weeks of pressure from fiscal concerns and a cautious Federal Reserve (Fed) stance.

That said, the British Pound's broader strength remains largely intact, underpinned by domestic factors that have altered market expectations around the Bank of England's (BoE) next moves.

"While the pound's recent strength is largely a dollar weakness story, there are a few idiosyncratic factors at play," said Michael Brown, senior research strategist at Pepperstone. "We did have a much more hawkish than expected May policy decision from the BoE, then compounding that we had hotter than expected UK inflation last week, which has seen participants continuing to trim their bets on BoE easing this year."

Market participants are now pricing in a lower probability of rate cuts by the BoE in the second half of 2025, especially after last week's CPI data surprised to the upside.

The Bank of England (BoE) cut its benchmark Bank Rate by 25 basis points to 4.25% at its meeting on May 8.  However, market pricing has now adjusted firmly in favor of a pause, with Reuters reporting that 93.6% of traders expect the central bank to keep rates unchanged at the next meeting.

In the United States, fresh economic data released on Tuesday revealed that Durable Goods Orders for April printed at -6.3% from 7.6% growth in March, driven by a significant decline in orders for transportation equipment, particularly Boeing. Conversely, Consumer Confidence rebounded in May, with the Conference Board's index rising to 98.0 from 85.7 in April.

Looking ahead, traders await the FOMC Minutes on Wednesday, Q1 GDP revision on Thursday, and April PCE data on Friday. Fed speeches throughout the week may also guide rate expectations. Meanwhile, commentary from BoE policymakers could further shape the outlook for the British Pound.