Pound is up 8% in opposition to the greenback since January – this is why

Sterling rallied against the US dollar on Thursday as markets weighed the implications of sweeping US import tariffs set to come into force next week.

Britain faces a 10 per cent levy on imports to the US, having skirted much harsher tariffs imposed on the European Union and South East Asian trading partners.

The harsher than expected tariffs sparked further weakness in the US dollar, thereby strengthening other global currencies.

The pound was up almost 1 per cent again the dollar approaching midday on Thursday, while the euro added almost 1.1 per cent against the US currency.

Sterling took a slight knock last week as markets weighed in the implications of spending cuts announced in Rachel Reeves’ Autumn Budget.

However, sterling has still added 5.3 per cent against the dollar since the start of the year after clawing back heavy losses suffered in January.

The pound kicked off 2025 on the backfoot, falling around 2.8 per cent against the dollar within the first two weeks of the year, as UK borrowing costs hit a fresh 27-year high on concerns about the British economy.

But sterling has since rallied around 8.3 per cent from its January low, reflecting lower government bond yields but largely the result of a much weaker dollar.

The pound is down 1.2 per cent against the euro since the start of the year at €1.19, with the eurozone currency up 6.5 per cent against the dollar in 2025.

Global head of markets at ING Chris Turner said: ‘The blowback of US tariffs onto the US domestic economy leaves the dollar naked.

‘US rates continue to be marked lower, and not until we get some surprisingly good news from the US on tax cuts or deregulation may the dollar start to find some support.’

Further pain for dollar and further gains for sterling?

His colleague Francesco Pesole, an FX strategist at the Dutch bank, Britain’s highlighted recent diplomatic efforts to secure a trade agreement with the US as potentially leaving sterling well placed.

He said: ‘The more markets will see room for the initial tariff announcement being watered down via negotiations, the more sterling can outperform the euro.

‘We mostly see downside risks for EUR/GBP in the near term, with a move below 0.830 very much possible. In the longer run, there will be room for a rebound as the Bank of England rate expectations can be repriced lower.’

The Amundi Investment Institute is forecasting a decade-long trend of decline for the US dollar, which it says is the second most overvalued currency in the G10, after the Swiss Franc, even after the recent dollar correction.

Head of developed market FX Federico Cesarini said: ‘We expect the USD to weaken in the next decade: a move in line with the potential (and gradual) convergence of US yields and growth towards the G10 average and the stock market rebalancing towards global equities, which offer more compelling valuations.

‘Among others, we see the Japanese yen more than 30% below its fair value and expect it to deliver the highest returns over the next 10 years.

‘The euro and pound sterling show similar patterns. Higher yields relative to the pre-pandemic years dating back to the Great Financial Crisis, a recovery in trade balances and terms of trade, and substantial undervaluation make these currencies attractive in the medium term.’