GBP/USD hovering near 38-Month high as market momentum shifts
The pound is trading just below $1.34 this morning, holding close to its highest level in over three years after briefly touching that mark on Tuesday. This recent strength has been fuelled by a broadly weaker US dollar and calmer market conditions. With a 3.8% gain so far in April, sterling is on track for its best monthly performance since November 2023.
However, against the euro, the picture is less favourable. Sterling is heading for a second consecutive monthly decline of around 1.5%, the sharpest two-month drop since the latter part of Q3 in 2022.
The UK’s limited exposure to current US trade restrictions—temporarily suspended until July—has helped mitigate some external risks. In fact, the US is expected to run a $12 billion goods surplus with the UK this year, standing in contrast to trade deficits with China and the EU. Still, Britain’s heavy dependence on global trade and investor sentiment leaves it exposed. Recent flash PMI data showed UK business activity has fallen to its lowest level in three years.
The Bank of England’s cautious stance on interest rate cuts—markets are pricing in 85 basis points of easing this year—has lent some support to the pound. Yet, correlations between FX and rates markets have become increasingly unreliable.
Technical signals such as the relative strength index suggest the pound's rally against the dollar may be losing traction. Even so, rising concerns over the health of the US economy—and the waning dominance of the “American exceptionalism” narrative—could give GBP/USD further upside potential, especially if upcoming US data underwhelms.
Dollar steadies for now, but economic headwinds strengthen
The US dollar has recently levelled off, following President Trump’s partial retreat from aggressive policy stances on the Federal Reserve and trade. While this has helped calm markets temporarily, the broader pressures on the dollar remain firmly in place. Rather than fears about the dollar’s role as a global reserve currency, the real concern lies in the potential for a sharp US economic slowdown, driven by trade disruptions and increased uncertainty.
Recent data points suggest mounting risks. Investors are closely eyeing the first-quarter GDP figures due today, against a backdrop of weakening indicators. Job openings have disappointed, though a reduction in layoffs offers a modicum of reassurance. However, consumer confidence has taken a notable downturn, reaching its weakest level since May 2020. The expectations index has plunged to levels last seen in 2011, reflecting widespread anxiety largely triggered by the newly introduced global tariffs, which rattled markets when announced and continue to cast a shadow over the economic outlook.
The labour differential—measuring the gap between jobs being plentiful versus hard to get—has also slipped to a six-month low. Still, this isn’t ringing alarm bells yet. Markets have shown limited reaction so far, though that may change quickly if job losses begin to accelerate. All eyes are now on Friday’s jobs report, which could prove pivotal.
Meanwhile, the trade picture is showing signs of strain. March saw the US goods deficit hit a record $162 billion, well above forecasts, as import volumes surged. This rise reflects a pre-tariff buying spree by businesses and consumers attempting to beat the 2 April tariff deadline—highlighting how policy signals are already having tangible effects on trade dynamics and economic data.
Euro climbs as broader shifts undermine Dollar
The euro is on course for its best monthly rise since late 2022, though some near-term volatility could emerge—particularly if month-end investment flows rotate back into the US dollar, following weaker US equity performance and dollar softness throughout April.
The drivers behind the euro’s advance extend well beyond interest rate dynamics. Global markets are now navigating a far more intricate backdrop, shaped by political uncertainty, policy divergence, and a slow but steady shift away from the US dollar in global trade and finance.
While there has been a cooling in short-term euro enthusiasm, positioning in currency options suggests this is temporary. Traders are signalling renewed appetite for euro strength, as seen in the widening spread between one-week and one-month risk reversals. Longer-dated contracts are also leaning more bullishly, with one-year risk reversals nearing their firmest levels since September 2020.
The single currency’s strength is not solely down to optimism around the eurozone. Germany’s recent fiscal stimulus announcements gave the initial lift, but the real engine behind the euro’s rise has been sustained dollar weakness. As investors reassess global currency trends, the idea of EUR/USD reaching $1.20 this year is gaining increasing support.
Looking ahead
For the remainder of the week, FX markets are facing a mix of event risks and underlying structural factors. Key economic data, particularly Friday’s Non-Farm Payrolls report, will likely influence expectations around US interest rates and the US dollar’s trajectory. In addition, releases such as the ISM Services PMI and Initial Jobless Claims will provide further insight into the US labour market and inflationary trends.
Month-end portfolio rebalancing flows could lead to temporary volatility, especially if equity weakness or bond buying persists, potentially affecting the USD and other currencies.
With GBP/USD near a 38-month high and EUR/USD continuing its upward movement, markets remain sensitive to technical resistance levels and shifts in investor positioning, which could result in profit-taking and short-term reversals.
In the background, ongoing tariff wars and trade policy uncertainties will continue to affect market sentiment. These tensions, particularly between the US and key trading partners, may keep volatility elevated as businesses and investors adjust to the shifting landscape. Additionally, geopolitical risks, such as instability in the Middle East and Ukraine, may drive demand for safe-haven currencies like the USD, JPY, and CHF.
