The British pound’s ‘bizarre behavior’ is dividing market watchers
LONDON — Tariffs, economic uncertainty and political challenges have created a difficult-to-navigate U.K. market this year, sparking some turbulence for the country’s currency. The pound has gained around 7.2% against the U.S. dollar in the year to date, while losing 4.3% against the euro, with some significant bumps along the way. GBP= YTD line GBP/USD ‘Bizarre behavior’ Part of the picture is dollar weakness arising from a broad rotation out of U.S. assets , which has benefited both sterling and the euro. But the economic and geopolitical backdrop entangling the U.K. in recent months have clouded the picture for the British currency. Earlier this year, the U.K. became the first country in the world to sign a trade deal with the Trump administration following the president’s unveiling of his so-called “reciprocal” tariffs. Meanwhile, stronger-than-anticipated economic growth , rising consumer confidence and business momentum helped stir a tone of cautious optimism among some investors. On the downside, markets have been contending with Britain’s lackluster labor market , concerns about the country’s finances and political U-turns from the ruling Labour party. In emailed comments on Friday, Arturo Bris, a professor of geopolitics and finance at Switzerland’s IMD Business School, labeled the British pound “the currency that presents the most bizarre behaviour during 2025.” “That the U.K. reached a relatively favorable tariff deal with the U.S. helps [the case for the pound],” Bris told CNBC. “However, in the middle of political turbulence, post-Covid difficulties of the British economy, and growing pessimism about the future of the U.K. economy, capital has flown out of the country … showing that British money is looking for safer markets.” Following a hotter-than-expected inflation print earlier this week, markets began to reduce their bets on the Bank of England continuing its rate-cutting cycle this year, with capital markets now overwhelmingly expecting the central bank to keep rates steady through 2025, according to LSEG data. The pound’s trajectory since then has created fresh difficulty for FX traders, according to Kamal Sharma, a senior FX strategist at Bank of America. “As you’d expect, as the market pared back rate cuts, sterling rallied — and then suddenly, out of nowhere, we saw quite a big move in the opposite direction,” he said over a phone call. “Trying to pinpoint that is difficult.” Sharma noted that, for much of the year, markets had taken a bearish position on sterling — but he argued that, in his view, the pessimism was “probably excessive” and anchored in a view that “the U.K.’s fiscal position remains quite perilous.” Amid rebellion from some lawmakers within her own party over proposed welfare cuts, U.K. Finance Minister Rachel Reeves has limited fiscal capacity to fund her spending plans, leading to widespread speculation that tax rises are inevitable . Analysts polled by Reuters earlier this month broadly expected the pound to reach $1.37 by the end of January — but forecasts among top contributors varied from $1.22 to $1.42. For his part, BoA’s Sharma has a price target of 0.82 euros per pound by the end of the year and sees Cable reaching $1.40. Sterling was last seen trading at around 0.865 euros and $1.156. “The [economic] data is now starting to show some signs of stabilizing,” he said on Friday. “We still think there will be some more rate cuts in the U.K. in November, but ultimately, this is about terminal rate pricing as well … there’s lots of positives for the euro, both against the dollar and against sterling.” He said markets appeared to be looking ahead to 2026 as the “seminal game-changing event for the European economy,” thanks to huge fiscal spending plans from Germany , ramped-up defense spending and a potential improvement to the integration of regional capital markets. “With the pound, it does seem that the market is taking a very much a glass half empty rather than glass half full approach — I think it is all pretty excessive, but from an outsider’s perspective and non-U.K. perspective, it’s a compelling reason to be short sterling,” Sharma added. He said he was taking the view that sterling would benefit from U.K. goods being subject to lower “reciprocal” U.S. tariffs than any other nation. “What this all boils down to is we need more growth,” Sharma told CNBC. “If we can deliver a bit more productivity in the next couple of months, that may encourage investors to dial back some of that pessimism.” Javier Corominas, director of global macro strategy at Oxford Economics, meanwhile took a more pessimistic approach to sterling than Sharma. “We expect GBP/USD to consolidate at current levels over the summer, before converging to the 1.25-1.30 range in Q4,” he said in a July 8 note, to which he pointed CNBC when asked on his views on Friday. “GBP/USD was driven by dollar weakness, rather than underlying pound strength in H1. Our fundamental valuation anchors now point to an overvalued pound.”
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