GBP/USD Surges to 4-Month Highs Amid US Dollar Weakness
The ongoing decline of the US dollar has propelled GBP/USD to fresh four-month highs, surpassing the $1.29 mark. The pair has broken through key resistance levels, including the closely monitored 200-day and 200-week moving averages, signalling a bullish trend. Additionally, short-term risk reversals in the FX options market, favouring further sterling strength, have reached their highest levels in nearly five years.
Investor expectations of US dollar outperformance due to trade war tensions are waning, as concerns over stagflation in the US take centre stage. Instead of seeking the USD as a safe haven, traders are focusing on weaker US economic data compared to improving UK and European data, boosting the pound. Interest rate differentials are also shifting in favour of the UK and Europe, as rising bets on Federal Reserve rate cuts contrast with surging German bund yields. The UK’s 10-year yield saw its largest jump in over a year, lifting UK-US yield spreads to an 18-month high, further fuelling sterling’s rally.
Despite a near 7% climb from January’s $1.21 low and a 2.6% rally this week, GBP/USD is now in overbought territory, according to the 14-day relative strength index. This suggests a possible consolidation or pullback, with the psychological $1.30 level now acting as the next resistance. Meanwhile, GBP/EUR has dropped 1.5% this week, experiencing its sharpest single-day loss in five months as stronger euro inflows take precedence.
Germany’s Bold Spending Shift Fuels Euro Strength
Germany is set to make a historic shift in its fiscal policy with a multi-billion-euro commitment to boost infrastructure and defence spending. To fund these initiatives, the government plans to amend the constitution, enabling it to borrow substantial sums. This move has sent German 10-year bond yields soaring—a key indicator of debt costs. Incoming Chancellor Friedrich Merz emphasized the urgency, stating in Berlin on Tuesday, “In view of the threats to our freedom and peace on our continent, the motto ‘whatever it takes’ must now apply to the country’s defence.”
The surge in bond yields is attracting global investors seeking higher returns, leading to strong capital inflows into the euro. This has strengthened the single currency, causing GBP/EUR to suffer its steepest single-day decline in five months on Wednesday, bringing the week's total drop to 1.55%.
For years, economists and analysts have argued that Germany’s rigid debt controls have stifled economic expansion, particularly in times of economic hardship. The newly proposed measures, backed by both the conservative CDU/CSU bloc and the ruling Social Democrats (SPD), aim to change this. Key reforms include exempting defence spending exceeding 1% of GDP from debt restrictions and establishing a €500 billion infrastructure fund to modernize critical sectors and stimulate economic growth.
This shift in fiscal policy marks a decisive move away from austerity and toward greater investment—an approach analysts predict will bolster the euro and European assets. European defence stocks have already surged, contributing to the Eurozone’s equity market outperforming the U.S. in 2025. Meanwhile, the European Union is preparing to raise up to €150 billion through special bond issuances to finance military spending. By leveraging the EU’s top-tier credit rating, member states can access funds at significantly lower interest rates than if they borrowed individually.
Germany’s strategic pivot signals a new era of fiscal flexibility, positioning the euro as an increasingly attractive prospect for global investors.
