The British pound has strengthened 8.7% against the U.S. dollar this year, reaching its highest level since January 2022. Once seen trading around the $1.36 level and trading decisively above that, it had a remarkable run to the dollar. This comes in the face of continued economic malaise for the UK. Market analysts credit this increase to a few different things. One major driver is Donald Trump’s erratic trade wars that have created a crisis of confidence in US assets and ignited fears of de-dollarization.
The pound has appreciated historically well over the past few months. This transformation takes place as the U.S. dollar weakens from the changing market perception about the status of the American economy. The dollar index has experienced volatility over the past quarter. Analysts, like Janet Mui, head of market analysis at RBC Brewin Dolphin, say the pound’s strong showing just highlights how weak the dollar is.
“Relative strength of the pound has been more of a weak U.S. dollar story this year,” Mui stated. She pointed out that while the pound has shown resilience, “further upside for the pound may be limited due to softer UK economic momentum and more scope for the Bank of England to cut rates.”
Although the pound is performing well against the dollar, it’s fared worse against the euro, down 2.9% so far this year. One pound currently buys around 1.173 euros. This divergence just goes to show what a complicated world we’re living in, with lots of factors competing in the currency markets.
The Bank of England has acknowledged signs of slowing economic growth and inflation within the UK, raising concerns over future monetary policy. Most analysts believe these indicators will force the Bank to make even more rate cuts. Consequently, the value of the pound may be hurt as well.
Brian Mangwiro, an investment manager at Barings, takes a more sober view on the pound’s prospects. Consequently, despite the recent positive data surprises that have been lifting the GBP, he argues that the fundamental economic picture is one of a growing slowdown.
“Markets had been overly bearish on the UK following Chancellor Reeves’ Budget,” Mangwiro noted. He continued to express concern about the future prospects: “Consequently, positive data surprises became supportive to GBP. Our GDP forecast slightly up but there are signs of slowing growth and inflation. We still anticipate modest growth in the UK economy. The Bank of England is recognizing these changes too. This is supportive of more BoE rate cuts and by extension, bearish for the pound.
As for the dangers posed by de-dollarization, he views them as alarmist. Still, he concedes that mood may shift if the U.S. growth picks up and corporate earnings remain solid.
“Sentiment will likely reverse as U.S. growth outlook rebounds and corporate earnings remain resilient,” he added. Finally, he noted that extreme short positioning on the dollar might be a catalyst for a USD rebound. This GBP positive rebound would likely drag the GBP lower.
Some analysts are hopeful that the pound has more strength to come. They think that better relations with the European Union would provide the biggest accelerator. Janet Mui noted that “improved relations with the EU, particularly if it translates into more concrete action over time,” could enhance the pound’s position.
Against the dollar, Invesco’s Jackson is predicting a more than 2.9% premium from current exchange rates. This indicates that there is still potentially room for growth in the short term.