The pound sterling has climbed to its highest level against the US dollar in four years, trading above $1.38 this week. For British holidaymakers planning transatlantic travel, the timing appears fortuitous.
Yet the rally says more about the dollar’s malaise than any notable resurgence in the British economy. Since the beginning of the year, the greenback has slumped 10.8% against a basket of rival currencies—its worst first-half performance since 1973.
The dollar’s decline has not gone unnoticed. Currency traders and financial advisers alike have urged travellers and investors to consider locking in rates while Sterling remains strong, particularly for those with exposure to the US or Canada. Against the Canadian dollar, the pound now buys C$1.87, a level not seen since the immediate aftermath of the Brexit referendum in 2016. In contrast, the pound has struggled to gain traction against the euro, which has held firm at around €1.17—down from €1.20 in late May.
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The divergence across currencies reflects a complex set of global dynamics. The weakness of the US dollar stems from a confluence of political and economic uncertainty. Markets are unnerved by suggestions that Donald Trump may attempt to reshape the Federal Reserve’s leadership. In the short term, speculation that the Fed could face pressure to ease policy has rattled investors.
At the same time, economic data out of the United States have underwhelmed. First-quarter GDP growth was revised downward to show a 0.5% contraction. Retail sales have softened, and major ratings agencies have issued warnings on the US fiscal outlook.
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Against this backdrop, the pound has found support. The Bank of England, though facing mounting pressure to ease monetary policy, has so far resisted rate cuts. This divergence in interest rate expectations has attracted yield-seeking capital to UK assets.
Meanwhile, the UK economy, though hardly buoyant, has proven more resilient than some feared. Employment data have remained relatively stable, and inflation—while falling—has not yet prompted a decisive shift in monetary policy. The result is a pound that looks stronger, at least in relative terms.
Could the GBP’s strength be temporary?
Yet appearances can be deceiving. Analysts caution that GBP strength may be temporary and largely a function of dollar weakness, rather than a vote of confidence in Britain’s economic trajectory. After a solid start to the year, driven by front-loaded consumer demand and export activity, UK growth has faltered. April GDP shrank by 0.3%, retail activity has weakened, and job losses have begun to mount. The Bank of England has hinted that a rate cut may come as soon as August.
Moreover, currency markets are rarely driven by domestic factors alone. The euro, for instance, has also gained ground against the dollar, aided by capital inflows from investors seeking stability amid US volatility. The European Central Bank has maintained relatively high interest rates, narrowing the yield differential with the UK. Political tensions in France and elsewhere have eased somewhat, allowing the euro to stabilise. This has prevented the pound from making similar headway in the GBP/EUR cross.
History, too, offers perspective. Since the Brexit referendum, Sterling has largely traded within a broad band of $1.20 to $1.40. Breaks above or below this range have tended to be short-lived, often driven by extraordinary events—such as the market turmoil that followed the ill-fated Truss–Kwarteng “mini-budget” in 2022. In the longer view, Sterling’s current level remains well below its pre-financial crisis highs, when it routinely traded between $1.50 and $1.70.
As with all currency moves, forecasting remains an inexact science. While the pound may push higher in the short term, the case for further sustained appreciation is tenuous. The US economy, despite its present wobbles, retains structural advantages. Should political tensions ease or economic data improve, the dollar may well rally. For now, Sterling enjoys a moment of relative strength—but it may prove fleeting.
