Pound's Gain Against Euro Tied to Dollar's Performance
The British pound's recent gain against the euro is largely due to the dollar's performance rather than any changes in the UK economy. The GBP/USD and EUR/USD exchange rates have diverged, with the dollar experiencing a sharp jump on Friday. This has caused the euro-dollar exchange rate to fall more significantly than the pound-dollar exchange rate.
As a result, the pound-to-euro exchange rate strengthened on the day. However, this trend is still influenced by cross-currency dynamics, and the recovery of the dollar will likely impact the GBP/EUR rate in the near term.
Kamakshya Trivedi, an FX strategist at Goldman Sachs, notes that near-term cyclical considerations are more supportive for the Dollar, citing steady US growth, a potentially positive Q2 earnings season, and renewed geopolitical tensions that could refocus attention on Europe's risks.
Barclays also points out that the 'dollar premium', which measures the discount investors require to hold dollars, continues to hover near 5.5%. A reduction in this premium would support the USD, implying a high bar for further dollar weakness.