What’s Next for the British Pound as It Hits a Nearly Four-Year High?

LONDON – The British pound (GBP) surged to its highest level since October 2021 this week, hitting $1.3736 against the U.S. dollar (USD), a rise of over 0.5% on the day. According to LSEG data, the pound is up almost 10% year-to-date versus the greenback. However, against the euro (EUR), it has declined 2.9% so far this year, recently trading at around 1.173 EUR.

Dollar Weakness Driving the Rally

According to Janet Mui, Head of Market Analysis at RBC Brewin Dolphin, the pound’s strength in 2025 is more about dollar weakness than a show of confidence in the UK economy.

“The relative strength of the pound has been more of a weak U.S. dollar story this year,” she told CNBC.

Geopolitical uncertainty, particularly stemming from Trump’s unpredictable trade policies, has shaken investor confidence in the U.S., fueling fears of de-dollarization and triggering outflows from dollar-denominated assets.

Recovery from the “Mini-Budget” Fallout

Paul Jackson, Global Head of Asset Allocation Research at Invesco, noted that the pound is still recovering from the historic lows triggered by former Prime Minister Liz Truss’s mini-budget crisis in 2022. However, he emphasized that much of the 2025 gains are linked to the decline of the dollar, especially since sterling continues to weaken against the euro.

Forecast: Where Is Sterling Heading?

Jackson believes the following exchange rates could be in sight within 12 months:

GBP/USD: 1.40

GBP/EUR: 1.15

He suggests the ECB has likely completed most of its rate cuts, while the Bank of England (BoE) and the Federal Reserve still have more room to ease, which may weigh on their respective currencies.

Limited Near-Term Upside?

Mui warns that the near-term outlook for the pound may be limited, citing:

Slower UK economic momentum

Increased likelihood of BoE rate cuts

Still, she sees improved UK-EU relations as a potential long-term catalyst for the pound if it leads to more concrete policy actions.

Barings’ Bearish Outlook

Brian Mangwiro, Investment Manager at Barings, takes a more bearish stance on sterling:

Forecasts GBP/USD to fall to 1.30

Sees EUR/GBP rising to 0.875 within 6 months

He argues that sterling’s recent gains don’t align with the UK’s economic fundamentals and are more reflective of temporary USD weakness.

“We continue to expect UK growth and inflation to slow, and the BoE is already signaling in that direction,” he said. “This supports further rate cuts, which will weigh on the pound.”

Mangwiro also sees de-dollarization fears as overblown, expecting sentiment to shift back in favor of the dollar as U.S. economic growth stabilizes.

A Currency with History, Facing Modern Challenges

Jackie Bowie, Managing Partner at Chatham Financial EMEA, describes GBP as a currency with a “prominent role in global FX” but one that’s struggling to reclaim its former status.

She forecasts moderate UK growth supported by government spending, but warns that the pound’s fate will largely be shaped by:

Relative monetary policy paths

U.S. political uncertainty

Global geopolitical dynamics

Conclusion

The British pound’s rally in 2025 is being driven more by the weakness of the U.S. dollar than strong UK fundamentals. While some analysts see further upside, most agree the pace of gains may slow in the short term. Key factors to watch include central bank policy decisions, UK-EU relations, and the global risk landscape.

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