The pound hit a three-year high on Friday, marking its strongest weekly gain against the dollar since early April. This rally came after unexpectedly strong UK retail sales data and growing investor anxiety over U.S. financial policies.
Sunny weather in April gave British consumer spending a boost. The Office for National Statistics reported a 1.2% monthly increase in retail sales, far exceeding economists’ 0.2% forecast. In contrast, March saw a downwardly revised gain of just 0.1%.
On Friday, sterling reached $1.3468, its highest level since February 24, 2022—the day Russia invaded Ukraine. At that time, global investors fled to traditional safe-havens like the dollar. Now, however, concerns about the U.S. economy are pulling capital out of American markets.
One key source of volatility is U.S. President Donald Trump’s inconsistent trade policy. While some deals and pauses have emerged, his frequent use of tariffs has rattled investors. Adding to the uncertainty, Trump’s sweeping tax and spending reforms are set to inflate U.S. debt by trillions, weakening confidence in long-term Treasury bonds.
As a result, investors are turning to other markets. UK gilts, for instance, have become more appealing. Yields on 30-year gilts topped 5.5% on Friday, the highest among major developed economies—even as UK energy bills are expected to fall.
Kathleen Brooks, research director at XTB, noted, “The market remains wary of lending to the UK while the government lacks control of public spending, even if lower energy prices are pulling short-term yields down.” She warned that bond markets could once again influence UK fiscal policy, given their current volatility.
In addition to positive economic data, geopolitical developments supported sterling. On Monday, the UK and the European Union agreed to a significant post-Brexit reset, easing trade restrictions, improving defence cooperation, and addressing sensitive issues like fishing rights.
Also fueling the pound’s strength was a surprise uptick in UK inflation, reported on Wednesday. This reduces the likelihood that the Bank of England will cut rates soon. Futures markets now predict a 38 basis-point drop in UK rates by year-end, which suggests one quarter-point cut and a 50/50 chance of a second. By contrast, traders expect 50 basis-point cuts in both the U.S. and eurozone over the same period.
