Image © Adobe Images
Pound Sterling Reaches New Three-year High against struggling Dollar.
In our Week Ahead Forecast released on Monday, we said we were expecting a breakout this week, and a breakout is exactly what you got:
The Pound to Dollar exchange rate (GBP/USD) touched 1.35 on Friday, its highest level in three years, delivering dollar buyers purchasing power not seen since February 2022.
Gains follow a brace of above-consensus UK economic data releases, culminating with Friday's hot retail sales figures, which means the Bank of England really will struggle to justify why it is cutting interest rates.
"Very strong retail sales in April. Excluding motor fuel, the value of spending is up 6.2% on a year ago & volumes up 5.3%. Even allowing for good weather, these are very substantial increases, not consistent with a struggling economy or lack of consumer demand. Why is MPC cutting rates?" asks Andrew Sentance, an ex-member of the Bank of England's Monetary Policy Committee.
Helping the Pound higher has been a notable retracement in market-implied expectations for the future trajectory of UK interest rates. We walked into the week looking for two rate cuts, but now we are down to one, with a second being given odds of less than 50%.
This readjustment is bolstering UK bond yields, which are rising faster than they are in other major economies, creating demand amongst international investors seeking higher returns on their capital, creating a positive inflow of funds that drives up the Pound.
Above: GBP/USD at daily intervals with our Week Ahead Forecast annotations that were set on Monday. The breakout we predicted has delivered.
"GBP/USD has risen by around 1.3% over the week so far. USD weakness is part of the story. But GBP/USD has also been supported by interest rate differentials. The two‑year differential between UK and US government bonds has moved back into positive territory this week because markets have pushed back the timing of the next Bank of England interest rate cut to November from September," says Kristina Clifton, Senior Currency Strategist at Commonwealth Bank.
Although the UK story is supportive, it is the Dollar side of the equation that is really driving the Pound-Dollar rally.
A plethora of uncertainties have bedevilled the U.S. economy in 2025 as President Trump enacts a scattergun trade policy and pushes through legislation that will see the country's debt pile balloon in the coming years.
Above: The yield on U.S. 30-year debt has surged as investors fret about U.S. debt.
The question being asked is how much debt can global investors continue to suck up? If they can't meet the supply of U.S. treasuries, the Dollar must fall.
"We also move the US dollar to Unattractive this month... we anticipate renewed weakness as the U.S. economy slows and the focus on fiscal deficits expands. We favour using near-term dollar strength to reduce excess US dollar cash by diversifying into other currencies," says Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.
Meanwhile, the latest weekly FX strategy note from UBS released on Friday says buying Sterling against the Dollar is an attractive near-term tactical trade.
"With a US-UK trade deal now announced, we believe the GBP can profit from the UK being the only country so far to have signed a proper trade deal with the US. We like being long GBPUSD at 1.3390, targeting a move toward 1.38," it says.