The divergence between the US dollar and the euro widens. What additional conditions are needed for the British pound to rise to 1.40?

The divergence in the USD versus EUR trend is reshaping the foreign exchange market landscape. Against this backdrop, the GBP/USD may have room to rise to 1.40, but this increase is based on the weakening of the dollar’s own momentum rather than strong fundamentals in the UK.

Weak U.S. Dollar Rebound, Fundamental Momentum Significantly Diminished

Following the Federal Reserve’s recent decision, the dollar experienced a brief rebound. However, this rebound exposed a deeper issue: the dollar’s intrinsic support is waning. Strategists point out that although the dollar appears to be rebounding on the surface, the underlying economic momentum is gradually weakening. At the same time, the performance of the dollar against the euro reflects this — the dollar’s relative strength against the euro is diminishing, providing an opportunity for the pound to strengthen against the dollar.

The Pound Faces Multiple Headwinds and Persistent Pressure on the Euro

Although there is an upward expectation for GBP/USD, the pound’s performance within the G10 currency system has been less than ideal. Compared to major currency pairs like USD/EUR, the pound remains relatively weak against other developed market currencies. This indicates that the UK economy itself lacks strong catalysts to sustain a continuous appreciation of the pound.

Central Bank Policies as Key Variables, Geopolitical Factors Add Uncertainty

The Bank of England’s interest rate policy will directly influence the pound’s direction. If the BOE cuts rates more than market expectations, GBP/EUR could further decline, exerting downward pressure on the pound’s appreciation. Additionally, fiscal outlook changes ahead of the May UK local elections may also weigh on GBP/EUR and other exchange rates, weakening the pound’s relative competitiveness.

Overall, while a move to 1.40 for the pound is possible in the context of a weakening dollar, this target largely depends on the continued depreciation of the dollar rather than improvements in UK fundamentals. Investors should closely monitor the Fed’s policy trajectory, the BOE’s rate cut pace, and fluctuations in major currency pairs like USD/EUR to better gauge the pound’s future upside potential.