Sterling Surges to Three-Year High Amid Repricing of BoE Outlook

The British pound is firmly in the spotlight this morning, having surged to a fresh three-year high against the US dollar. A stronger-than-expected UK inflation print has led money markets to pare back expectations for Bank of England rate cuts in 2025, fuelling a sharp rise in UK gilt yields and lifting sterling.

Meanwhile, the US dollar remains under pressure as renewed fiscal concerns prompt a revival of the “sell America” trade.

A Case for Trumponomics?

Trumponomics is built on three core pillars: trade, taxation, and deregulation. Rather than acting in isolation, these elements are intended to operate synergistically, forming a cohesive policy framework.

Speaking at the Milken Conference, Scott Bessent suggested that the US administration is targeting a reduction in the fiscal deficit of around 100 basis points annually. Recognising that slashing $1 trillion in a single year could shock GDP by as much as 3%, policymakers are pursuing a more gradual path—aiming for a fiscal deficit of 3.5% of nominal GDP, while maintaining growth close to 3% within a year.

A key tenet of the strategy is to re-privatise the economy. Bessent advocates cutting government expenditure and reducing the public-sector headcount, arguing that deregulation—particularly within the banking sector—could empower community lenders, thereby stimulating local economic growth. By relaxing constraints, these smaller institutions would be better positioned to extend credit, fostering entrepreneurship and bolstering regional resilience.

On the trade front, the administration is taking a dual approach: broadening global market access while simultaneously reshoring critical manufacturing. Sectors such as pharmaceuticals, semiconductors, and steel—considered vital for national security—are at the heart of this strategy. By bringing production back to US soil, policymakers hope to enhance supply chain resilience and rebalance the economy.

At the same conference, the US Treasury Secretary argued that reducing the deficit could, in time, eliminate credit risk in US Treasuries—allowing interest rates to fall naturally. While this vision is attractive, the execution presents clear challenges. Fiscal tightening could temper short-term growth, and any misstep could erode market confidence, increasing volatility.

Despite having weathered major disruptions in recent decades—from the global financial crisis to pandemic-driven inflation—there is no guarantee that the current path will be smooth. Investors remain focused on trade policy, aware that tariffs and supply chain realignments could prove disruptive in the near term, even if beneficial over the long run. Concerns over stagflation, a weakening economy, and housing market vulnerabilities continue to mount. Ultimately, the success of Trumponomics hinges on the careful calibration of fiscal restraint, deregulation, and strategic trade policy.

Euro Breaks Higher on Renewed Dollar Weakness

The euro has reclaimed ground, climbing back above its 21-day moving average—an indicator we’ve been watching for several sessions—as the EUR/USD uptrend appears set to resume following a month-long consolidation that saw the pair retreat from $1.16 to $1.11.

Much of the euro’s strength stems from renewed US dollar weakness, with the EUR/USD historically exhibiting a beta of 0.88 to broad dollar moves. However, domestic factors in the Eurozone are also playing a role.

Data released yesterday showed the Euro Area’s current account surplus widened significantly to a record €60.1 billion in March, up from €37.7 billion a year earlier. Goods exports contributed the most, with the surplus rising to €51.9 billion, potentially reflecting efforts to front-run anticipated US tariffs. The services surplus also increased, reaching €12 billion.

Meanwhile, Euro Area consumer sentiment improved more than expected in May, though it remains well below historical norms. Despite market pricing for more aggressive easing by the European Central Bank relative to the Federal Reserve, euro bulls remain undeterred. Several hedge funds are now targeting a move beyond $1.20 as they re-establish short-dollar positions.

Structural headwinds for the dollar, combined with Europe’s relatively stronger cyclical outlook underpinned by fiscal stimulus, support a constructive medium-term view on EUR/USD. That said, the pace of gains is likely to be more measured than the earlier surge that lifted the pair by roughly 10% year-to-date.

Pound Rallies as Inflation Shocks to the Upside

Sterling has climbed to its highest level against the US dollar since February 2022, buoyed in part by dollar weakness following Moody’s downgrade of US credit. However, the move has also been driven by hotter-than-expected UK inflation data.

Headline inflation rose to 3.5% in April, up from 2.6% in March, primarily due to higher energy and transport costs. Core inflation accelerated to 3.8% year-on-year, above expectations of 3.6%, while services inflation—a key metric for the Bank of England—surged to 5.4%, well above the 4.8% forecast.

This unexpected jump has prompted markets to scale back their expectations for BoE rate cuts in 2025 by around 10 basis points. BoE Chief Economist Huw Pill recently cautioned that monetary easing may be proceeding too quickly, noting signs that inflation’s downward momentum is “stuttering”. The April spike had been anticipated, with contributing factors including Ofgem’s energy price cap hike, increased water bills, and rising employer national insurance contributions.

Yet it is the persistent strength in services inflation that has most significantly shifted market sentiment, pushing front-end gilt yields higher and further supporting sterling.

GBP/USD is now trading in the upper half of the $1.34–$1.35 range for the first time in three years. The pair has moved back above key daily moving averages and is now roughly 11% higher year-to-date. Notably, for the first time since the global financial crisis, options markets no longer exhibit a long-term bearish bias towards the pound.

However, given the concurrent rally in EUR/USD, sterling’s performance against the euro has been subdued—flat on the week, with no meaningful gains.