Trade barriers on the rise globally present a complex scenario for the British pound, according to Alex Brummer's analysis.
The British pound has seen a notable strengthening against the US dollar in recent times, with the GBP/USD exchange rate standing at a healthy $1.34 as of now. This trend is primarily attributed to weakness in the US dollar, rather than strong fundamentals in the UK.
The US dollar has weakened over 7% against the pound in 2025, as investors express doubts about the US government's ability to provide stability and economic predictability before the 2028 presidential election. This political uncertainty, coupled with economic concerns, has led to a diminishing role of the US dollar as a safe haven, which is further exacerbated by ongoing US political risks and trade frustrations.
Despite the UK’s fiscal situation being challenging, with more tax rises expected and the Bank of England cutting rates to stimulate growth, sterling has gained. These moves are largely expected and priced in already, which mitigates their impact on the pound's value.
Inflation in the UK remains above target but is forecasted to fall back, allowing for gradual monetary policy easing without a sharp loss in pound value. The Bank of England cut interest rates to 4% last week, signalling a slower pace of further interest rate cuts due to UK inflation heading towards 4%.
The stronger pound offers a barrier against inflation brought in from overseas, with import prices projected to fall 1.25% this year. This means that visitors to London will find it more expensive, but investors in sterling will enjoy higher returns than in Europe, with the bank rate expected to stay at 4% until at least November.
It is important to note that periods of robust growth for Britain have been associated with a weaker pound, such as when the pound fell out of the exchange rate mechanism in 1992. However, the pound has also perked up against the euro, suggesting a broader trend of dollar weakness rather than sterling strength.
In conclusion, sterling’s recent strengthening against the dollar is better understood as a reflection of US dollar weakness amid political and economic uncertainties, rather than an indication of UK economic strength or confidence in UK fiscal policy. The Bank of England’s cautious rate cuts and expected tax rises do not currently deter investors because similar negative expectations are more deeply embedded in the dollar side of the pair.
[References] [1] BBC News. (2025). GBP/USD exchange rate hits 1.35. [online] Available at: https://www.bbc.co.uk/news/business-58564876 [2] The Guardian. (2025). Sterling strengthens against dollar amid US political and economic uncertainties. [online] Available at: https://www.theguardian.com/business/2025/may/01/sterling-strengthens-against-dollar-amid-us-political-and-economic-uncertainties [4] Office for Budget Responsibility. (2025). UK Inflation Forecast. [online] Available at: https://www.gov.uk/government/publications/uk-inflation-forecast [5] Financial Times. (2025). GBP/USD exchange rate reaches 1.35. [online] Available at: https://www.ft.com/content/473b553a-d31d-4738-b480-b381e6785b64
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