Sterling’s rise driven by more than dollar weakness

Sterling’s nearly 8% rally against the US dollar this year is not simply the result of a weaker greenback. Compared to other major currencies, the pound has shown less sensitivity to dollar movements, suggesting a more independent and resilient path.

Optimism around the pound has grown, underpinned by strong UK data, trade progress, and the Bank of England’s firm approach to rates. April’s solid retail figures, improved consumer confidence in May, and stubbornly high inflation have supported sterling, particularly as the Eurozone moves in the opposite direction. As a result, the BoE is expected to cut rates slightly less than the ECB in the year ahead.

Global trends, such as reduced reliance on the dollar, have also helped lift the pound. But domestic momentum has been key, with the UK Economic Surprise Index at its highest in almost a year.

In contrast, the US outlook is darkening. Fed officials continue to strike a cautious tone, awaiting more clarity on tariffs and inflation. Business confidence is weakening, as seen in falling durable goods orders—especially in aircraft.

Meanwhile, President Trump’s on-again, off-again tariff actions are adding to market uncertainty. While the pattern is becoming more predictable, it does little to reassure investors already uneasy about US fiscal sustainability and the dollar’s role as the world’s primary reserve currency.

Euro gains ground as dollar loses momentum

The euro has been climbing steadily, with EUR/USD up nearly 10% since the beginning of the year. This strength largely reflects growing concerns over the US economic outlook. Notably, the euro is rising despite geopolitical uncertainty—particularly the erratic nature of US tariff policy—that would have previously dragged it lower.

Instead of acting as a risk-off casualty, the euro is increasingly viewed as a safe alternative when confidence in the dollar wanes. Even when tariff developments offer little direct benefit to Europe, they continue to push investors towards the single currency.

Focus now shifts to eurozone inflation data due on Friday. Deflation risks persist across the bloc, with most analysts pointing to subdued demand as the main driver. Falling oil prices and the euro’s recent strength are adding to the downward pressure on prices. France’s modest 0.7% annual inflation reading for May may offer an early glimpse of the broader regional trend.