Gulf investors may gain from UK pound recovery

GCC investors hold billions in UK sterling, largely through sovereign wealth fund stakes and private ownership of UK property. 

Now, a decade after Brexit sent the pound tumbling, macro conditions suggest the British currency may be entering an uptrend.

Sterling has climbed to almost 1.33 against the US dollar – still short of its pre-Brexit rate of 1.52, but a solid recovery nonetheless. The alignment of political stability, resilient capital inflows and shifting global currency preferences positions the pound to benefit from the weakening appeal of the dollar.

Donald Trump, who is in the Gulf embarking on an action-packed four-day tour, hailed his US-UK trade pact as a “breakthrough deal”. However, the deal in question had little impact on the British pound.

Nor has the agreement proven a useful template for deals with other major economies. The US does not run a trade deficit with Britain, and the pact lacks the heft required for replication with the EU, China, Japan, or South Korea.

Politically, however, it has enabled UK Prime Minister Sir Keir Starmer to position the ruling Labour party as the steady steward of the UK-US “special relationship” – even in the Trump 2.0 era.

Trump’s return has weighed heavily on the US dollar. His erratic trade policies, economic nationalism, and attacks on Federal Reserve Chairman Jay Powell have eroded confidence in the dollar. As a result, the global market turmoil in April failed to trigger the usual safe-haven flows into the dollar and US Treasury bonds.

The US Dollar Index fell from 110 in January 2025 to as low as 98 during the post-April 2 “Liberation Day” tariff panic.

Trump has since reversed his pledge to pummell China with punitive 145 percent tariffs and reduced the levy to a more palatable 30 percent. The US president has also abandoned his threat to terminate Jay Powell. These political climbdowns helped boost the US Dollar Index to 101.6 by mid-May 2025.

The British pound is an obvious beneficiary of the mega-trend towards non-dollar diversification in central bank reserves. The UK gilt market – bonds sold by the British government to raise money – is a historic, liquid magnet for foreign capital, attracting 102 billion pounds alone in 2024. 

Sterling has been a core reserve currency for GCC monetary agencies and central banks since the British empire Trucial States era and is second only to the dollar as a reserve asset.

The City of London’s role as the preeminent global banking hub stimulates offshore demand for sterling. The recent trade pact with the US renders the British economy relatively insulated from Trump tariff risks.

Unlike the German Bund. Government-bond gilt yields are not repressed by safe-haven capital flows, a macro nightmare in Switzerland and Japan. 

In fact the Bank of England’s hawkish stance on servicing inflation has boosted sterling money market rates. The two-year gilt note offers foreign central banks an attractive 4 percent yield.

The fall in Brent crude is a windfall for the UK balance of payments, while Starmer’s trade deals with the US, EU and India are strengthening investor confidence. 

With the Labour party holding a 400-seat majority in its parliament, Britain stands out as a bastion of political stability – especially when set against France’s political gridlock and growing ideological divisions within the EU.

In contrast US consumer spending – which comprises 70 percent of the country’s GDP – remains under stress. Business and consumer confidence metrics have plunged since Trump’s tariff tantrum in April.

White House economists have called for a lower dollar to stimulate a manufacturing renaissance and boost exports from the American heartland. FX economists and macro hedge fund managers believe that there will be an exodus of $2.5 trillion to non-dollar currencies in the next three years.

The May 7 meeting of the Federal Open Market Committee ended without a rate cut, as Fed Chair Powell cited rising inflation and unemployment risks linked to Trump’s new tariffs.

However, markets now anticipate three rate cuts in 2025, beginning in July. This expected monetary easing could lift sterling toward Goldman Sachs’ year-end target of 1.40 against the dollar.

Further bullish omens for pound can be seen in the turnaround in UK pension fund balances since the 2023 debacle of former PM Liz Truss, rising inflows into attractively priced British risk assets and growth in net UK-owned foreign assets above 120 percent of GDP.

These heartening figures are supported by robust household balance sheets and a fourfold increase in UK bank capital ratios since the 2008 financial crisis.

Matein Khalid is an investor in global financial markets and board adviser to leading family offices in the UAE and Saudi Arabia

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