Why Sterling’s Surge Above $1.35 Might Be Short‑Lived: What Savvy Investors Need to Know

• Sterling breached $1.35, but Fed minutes could pull it back below 1% this week.
• US Supreme Court tossed Trump’s emergency tariffs, easing dollar pressure on the pound.
• UK PMI hits fastest pace since April 2024; manufacturing and services both roar.
• Retail sales up 1.8% MoM in January, outpacing most Eurozone peers.
• Public‑sector net borrowing posted a record £30.4 bn surplus, boosting fiscal confidence.

Most investors missed the fine print on the tariff reversal—and that mistake is costing them now.

Why Sterling’s Bounce Signals a Potential Pivot in FX Trends

The pound’s climb back above the $1.35 threshold is not a random blip. It follows a chain reaction that began when the U.S. Supreme Court struck down former President Donald Trump’s sweeping emergency tariffs on steel and aluminum. By removing the tariff‑induced headwinds on the dollar, the ruling gave the greenback a breather, allowing sterling to recoup some of the losses it suffered in late January.

In forex parlance, a “headwind” is any macro factor that pushes a currency against its prevailing trend. With that headwind gone, the pound is now riding on a wave of domestic strength: a robust Purchasing Managers’ Index (PMI) reading and unexpectedly strong retail sales. Both metrics point to a healthier‑than‑expected UK economy, which traditionally underpins a stronger currency.

How the UK PMI Surge Rewrites the Sector Landscape

The S&P Global UK PMI for February surged to its highest level since April 2024, registering a 53.9 reading—well above the 50‑point expansion threshold. Manufacturing expanded by 3.2% YoY, while services logged a 2.8% gain. This dual‑engine growth is rare in a post‑Brexit environment where services have often outpaced a stagnating factory base.

For investors, the PMI is a leading indicator: it predicts GDP growth a few months ahead. A sustained PMI above 53 suggests that corporate earnings in both sectors could see a lift of 4‑6% in the next quarter, bolstering equity valuations for UK‑listed industrials and financials. Companies like Rolls‑Royce and BAE Systems, which are heavily tied to manufacturing health, may benefit from increased order books.

Retail Sales Upswing: Why Britain Is Outpacing Europe

January’s retail sales climbed 1.8% month‑on‑month (2% ex‑fuel), a figure that eclipses the Eurozone average of roughly 0.9% for the same period. The surge reflects pent‑up consumer demand post‑holiday season and a modest rebound in discretionary spending.

From an investment lens, the retail sector’s outperformance can translate into higher dividend yields for high‑yielding stocks like Tesco, Sainsbury’s, and Marks & Spencer. Moreover, the data hints at a broader macro trend: a resilient domestic consumer base that can weather global headwinds, a comforting sign for sovereign bond investors seeking lower default risk.

Historical Parallel: Tariff Reversals and Currency Reactions

Look back to 2018 when the U.S. renegotiated NAFTA and imposed tariffs on Canadian steel. The Canadian dollar slipped 3% in the immediate aftermath, but once the tariffs were lifted in early 2019, the loonie surged past the 1.30 USD mark within three months.

The pattern is clear—tariff uncertainty depresses a currency, and the removal of that uncertainty can trigger a rapid rebound. However, history also warns of a “bounce‑back fatigue” where markets over‑react, leading to a corrective pull‑back. In 2020, after the U.S. lifted certain Chinese tariffs, the yuan spiked but later settled lower as investors reassessed broader trade tensions.

Fiscal Discipline: Public‑Sector Surplus as a Hidden Bullish Driver

The UK’s public‑sector net borrowing posted a £30.4 bn surplus—the biggest monthly surplus on record. This fiscal prudence shrinks the sovereign debt issuance pipeline, tightening the supply of government bonds and potentially raising yields.

Higher yields make the pound more attractive to carry‑trade investors who borrow in low‑yielding currencies (like the JPY) to fund higher‑yielding GBP assets. In other words, the surplus could indirectly support sterling by improving the risk‑adjusted return profile of UK‑denominated assets.

Fed Minutes: The Counterforce That Could Drag Sterling Down

Despite the positive UK data, the Federal Reserve’s minutes revealed a split among policymakers on the path to rate cuts. Some members argued for a more aggressive easing schedule, while others cautioned that inflationary pressures remain too high.

When Fed officials are divided, markets tend to price in higher volatility for the dollar. If the Fed leans toward a dovish stance later this month, the dollar could weaken further, giving sterling a second wind. Conversely, a hawkish tilt could reignite dollar strength, eroding the pound’s recent gains.

Investor Playbook: Bull vs. Bear Cases for Sterling

Bull Case

• Continued UK economic resilience (PMI > 53, retail sales > 1.5% MoM).
• Further dollar weakness triggered by dovish Fed commentary or additional U.S. policy easing.
• Fiscal surplus sustains higher sovereign yields, attracting carry‑trade flows.
• Potential re‑pricing of UK equities, boosting equity‑linked currency demand.

Target range: $1.38‑$1.42 within the next 3‑6 months.

Bear Case

• Fed adopts a hawkish stance, raising expectations for higher U.S. rates.
• Unexpected UK data slowdown (PMI drops below 50, retail sales stagnate).
• Geopolitical shocks (e.g., renewed Brexit trade frictions) dampen investor confidence.
• Risk‑off sentiment pushes investors toward safe‑haven currencies like the JPY and CHF.

Target range: $1.30‑$1.34, with a possible dip below $1.30 if Fed surprises on the upside.

Bottom line: Sterling’s current rally is anchored in solid UK fundamentals and a one‑off U.S. tariff relief. Yet the broader macro backdrop—especially Fed policy—remains the wild card. Position your portfolio with a clear exit strategy, and keep an eye on the next Fed communication for the decisive signal.