Firm Strengthens to Three-Year High, Prioritizing Welfare Bill Vote Decision
The British pound edged up 0.4% to $1.378 on Tuesday, marking its strongest quarterly performance since the third quarter of 2022. This growth can be attributed to a combination of economic data, monetary policy, and global geopolitical developments.
The UK economy showed resilience in early 2025, with Q1 real GDP growth at 0.7% quarterly and 1.3% year-over-year, stronger than consensus expectations. UK inflation rose to 3.5% year-over-year in April 2025, the highest since early 2024, driven by a 1.2% month-over-month CPI jump, surpassing forecasts. This inflation uptick may affect monetary policy outlooks.
Despite rising inflation, the Bank of England cut interest rates by 25 basis points to 4.25% in May 2025. This policy easing contrasts with typical tightening in inflationary periods, signaling complex considerations by the BoE, likely balancing growth concerns.
The sterling's recent strengthening has been partly attributed to weakening US economic prospects and trade tensions, including President Trump’s international trade measures and rising recession probabilities in the US, which have favored the pound.
In Britain, data showed the manufacturing sector showed some signs of turning a corner in its long slump in June. However, a drop in gilt yields is limiting gains for sterling. Investors are awaiting the outcome of a vote in the British parliament on a welfare bill, which could test the stability of the Labour government run by Keir Starmer and weigh on the pound.
The proposed welfare reforms sparked a rebellion among lawmakers in Keir Starmer's party, and the government has made approximately 4 billion pounds of concessions to get the welfare bill through, but its passage is not guaranteed. Failure to get the welfare bill through could impact sterling and gilts, as further concessions may be required at a time when there is no fiscal headroom.
Global investors are scrutinizing a batch of reports on business activity performance. The euro's trading value against the pound is close to its highest since late April, with traders anticipating that the Bank of England will lower borrowing costs by at least 25 basis points in September. The Bank of England Governor, Andrew Bailey, highlighted Britain's softening labour market and an uncertain global economic outlook as factors that have "definitely" hurt economic growth and investment intentions.
Looking ahead, market consensus and PNC forecasts expect the pound to continue strengthening over the coming year, supported by the UK’s economic resilience and relative US weakness. If UK economic growth accelerates faster than anticipated or the US economy experiences greater softness, Sterling could gain further. However, the Bank of England’s accommodative stance amid rising inflation may limit the pound’s upside if inflation pressures intensify without commensurate policy tightening. External shocks—trade disputes, geopolitical tensions—remain key risks that could prompt currency swings.
- The resilient UK economy, characterized by strong Q1 growth and a higher inflation rate, has caught the attention of financial traders, with the expectation of a potential lowering of borrowing costs by the Bank of England in September.
- In the realm of politics and general news, the ongoing debate about welfare reforms in the UK parliament, led by Keir Starmer's government, could impact both the pound and gilts, as the outcome of the vote on the welfare bill may stress the Labour government's stability.
- As the UK continues to demonstrate economic strength compared to the US, the Defi and finance sectors are closely monitoring global economic developments, predicting the pound to further strengthen over the coming year. However, the Bank of England's accommodative stance during periods of inflation could limit the pound's growth, especially if inflation pressures intensify without corresponding policy tightening, and external shocks might instigate further currency swings.
