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The pound has rebounded strongly against the dollar and the euro in recent weeks, as a reversal of so-called Trump trades hits the US currency and investors bet that the UK economy may be faring better than previously feared.
Sterling has climbed 1.7 per cent against the dollar in February, its best month since September. It was flat on Friday, having risen from below $1.21 last month to as high as $1.2715 this week.
While inflation remains above target, better than expected retail sales and GDP data have provided a lift for investors worried about the UK’s anaemic growth.
“People were worried about stagflation but the growth side of that narrative doesn’t seem to be borne out by the recent data . . . there seems to be some feel-good forces at play,” said Kamal Sharma, an FX strategist at Bank of America.
The pound has also strengthened 1.3 per cent against the euro so far this month, and many analysts also believe the pound is better placed than other G10 currencies to ride the fallout from sweeping US trade tariffs, given the eurozone’s greater reliance on exports such as cars, which have been targeted by the new president.
That view was further bolstered on Thursday, when US President Donald Trump said he is working on a trade deal with the UK and suggested that Britain could escape tariffs if the countries secure one.
“We could very well end up with a real trade deal where the tariffs wouldn’t be necessary. We’ll see,” Trump said at a joint press conference with his UK counterpart Sir Keir Starmer at the White House.
The pound’s rally has also been driven by “cooling Trump trades” — the unwinding of bets that Trump’s election victory would fuel inflation and push up the dollar and other assets — and “surprisingly positive” UK economic data, said Brad Bechtel, global head of FX at Jefferies.
UK inflation rose to a 10-month high of 3 per cent in January, raising the prospect of slower interest rate cuts from the Bank of England, which has helped support sterling.
Foreign purchases of gilts, which are yielding more than US Treasuries, were providing a further tailwind for the pound, analysts said. Last year, foreign purchases rose to roughly £102bn, the highest level ever, according to BoE data.
Sterling had been lifted by the “hotter” inflation data and a perception that the UK had lower exposure to the US tariff threats, said Francesco Pesole, an FX strategist at ING. But he added that “a calm gilt market remains necessary” for the strengthening to continue, alluding to recent sell-offs in UK government bonds that have also weighed on the currency.
Meanwhile, other economists warned it was too early to call a significant improvement of the flagging UK economy. Public finances swung to a smaller than expected surplus in January.
“Things are a bit better on the back of very, very weak expectations,” said Hetal Mehta, head of economic research at St James’s Place.
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