Why the Pound Looks Strong Against the Dollar, but Not Against the Euro

GBP/USD is back around 1.36, close to its highest levels for several months. On the face of it, that looks like a strong run for the pound.

Look at GBP/EUR, however, and the picture is quite different. The rate is still hovering around 1.17 and has not followed GBP/USD higher.

That tells us something important about the move we have seen over the past week. This has been much more about weakness in the US dollar than any sudden improvement in the outlook for sterling.

For anyone with an upcoming currency requirement, the distinction matters. Someone buying dollars with pounds is currently looking at a considerably better exchange rate than they were earlier in the summer. Someone waiting to buy euros has seen far less improvement.

Why has GBP/USD moved higher?

There hasn’t really been enough positive UK news to justify the move on its own.

UK inflation rose to 2.9% in July, which could provide some support for sterling if it makes the Bank of England more cautious about lowering interest rates. But that was followed by disappointing retail sales, with volumes falling 0.5% on the month.

Sterling’s performance against the euro also suggests this isn’t predominantly a UK story. If investors had suddenly become much more optimistic about the pound, we would normally expect to see at least some of that reflected in GBP/EUR.

Instead, most of the action has come from the other side of GBP/USD.

The Federal Reserve kept US interest rates unchanged at 3.50% to 3.75% at its July meeting, but expectations for what happens next have shifted. Markets had previously been much more confident that another rate rise could come in September. Those expectations have since faded, taking some support away from the dollar.

There has also been plenty of attention on the US bond market. On 19 August, the US Treasury announced that it would increase purchases of longer-dated government bonds from September. The announcement coincided with lower long-term borrowing costs and further dollar weakness.

It would be too simplistic to say the Treasury announcement caused the entire move. Concerns around US government debt, changing Federal Reserve expectations and moves in the bond market have all contributed to a more difficult backdrop for the dollar.

GBP/EUR gives us a useful sense-check. Sterling hasn’t strengthened anything like as much against the euro, which suggests the recent GBP/USD move has predominantly been driven by the US side of the exchange rate.

Why this matters if you’re buying currency

This is where headlines about a “strong pound” can be misleading.

If you need to buy US dollars, GBP/USD around 1.36 represents a meaningful improvement on some of the rates available earlier this summer.

If you need euros, you’re looking at a different market altogether. GBP/EUR remains around 1.17, so the improvement has been much smaller.

It sounds obvious, but it is an important point when exchange rates start making headlines. Sterling can be performing extremely well against one currency while doing very little against another.

So if your requirement is in euros, don’t spend a Cable headline on a euro decision.

What happens next?

The focus this week is likely to remain on the US.

Core PCE inflation is due on Wednesday and will give markets another indication of how persistent US inflation remains. Attention then moves to Jackson Hole, where Kevin Warsh is expected to make his first appearance as Federal Reserve Chair.

If inflation comes in hotter than expected, or the Fed sounds more concerned about price pressures, expectations of another US rate rise could start to build again. That would potentially offer the dollar some support and could pull GBP/USD back from its recent highs.

Softer inflation or a more cautious message from the Fed could have the opposite effect.

We have looked at the Jackson Hole meeting and the potential implications for sterling in more detail in our Jackson Hole 2026 outlook.

GBP/EUR will also remain useful to watch. If GBP/USD continues moving while GBP/EUR stays relatively stable, it would reinforce the view that the dollar is still doing most of the work.

Euros or dollars to buy?

The recent move is a good example of why looking at headlines alone can be dangerous when planning a currency purchase.

The pound may be near a multi-month high against the dollar, but that doesn’t tell someone buying euros very much. What matters is the currency you need, when you need it and how much flexibility you have around the timing.

With US inflation data and Jackson Hole ahead this week, GBP/USD could remain volatile. GBP/EUR has its own set of risks, particularly as attention eventually turns towards the next Bank of England meeting in September.

If you have an international payment coming up, The Currency Desk can talk through the different options available for managing the timing of your currency purchase.

Exchange rates can move quickly and nothing in this article should be considered a recommendation to transact.

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