What’s next as the British pound hits its highest in more than three years?

The British pound is hovering at its highest level in more than three years — and analysts are divided on the potential for further upside.

Britain’s currency was last seen trading around the $1.36 mark on Wednesday morning in London.

It marked a slight drop from Tuesday, when sterling hit its highest level since January 2022.

So far this year, the pound has surged 8.7% against the greenback.

Against the euro, however, sterling is down 2.9% year-to-date. It was last seen trading marginally higher against the euro zone currency, with one pound buying around 1.173 euros.

According to Janet Mui, head of market analysis at RBC Brewin Dolphin, much of the pound’s upward trajectory is actually more to do with underlying dollar weakness than faith in sterling itself.

“The relative strength of the pound has been more of a weak U.S. dollar story this year,” she told CNBC by email on Wednesday.

U.S. President Donald Trump’s unpredictable trade policies shook confidence in American assets earlier this year, which in turn has sparked concerns in markets about de-dollarization.

Paul Jackson, global head of asset allocation research at Invesco, said sterling was on a recovery journey from the “extreme low” seen in the aftermath of former British Prime Minister Liz Truss’s so-called mini budget, which sparked a severe sell off of the pound and U.K. government bonds in 2022.

He agreed, however, that much of the movement this year was attributable to dollar weakness, pointing out sterling’s simultaneous depreciation against the euro.  

“I would expect that pattern to continue in the future, with the dollar weakening along with the US economy (and investor doubts about US fiscal and tariff policies), while the euro could strengthen on optimism about the implications of the coming fiscal boost (especially in Germany),” Invesco’s Jackson said.

He argued that the ECB had likely completed most of its monetary easing for the current cycle, whereas the Bank of England and the Federal Reserve “have a lot of catching up to do.”

“In 12 months, I would expect GBPUSD to be around 1.40 and GBPEUR to be around 1.15 (currently 1.17),” Jackson added.

Jackson’s forecast represents a roughly 2.9% premium from current exchange rates against the dollar.

RBC Brewin Dolphin’s Mui suggested that in the coming months, the outlook for the British pound is not overly compelling — but noted that geopolitical developments could catalyze further upward movements in the longer term.

“In the near-term, further upside for the pound may be limited due to softer UK economic momentum and more scope for the Bank of England to cut rates,” she said.

“Looking ahead, one potential catalyst for the pound could be improved relations with the EU, particularly if it translates into more concrete action over time.”

Brian Mangwiro, an investment manager with the multi asset group at Barings, took a more pessimistic view.

“We are bearish GBP in the medium term. We would forecast EURGBP at 0.875 and GBPUSD at 1.30 in [six months],” he told CNBC by email on Wednesday.

He argued that the macroeconomic backdrop does not justify sterling’s performance against the greenback this year, attributing it instead to a reflection of a post-liberation day sell-off of the U.S. dollar.

“Markets had been overly bearish on the UK following Chancellor Reeves’ Budget,” he added. “Consequently, positive data surprises became supportive to GBP. However, we continue to expect UK economic growth and inflation to slow; signs are already showing, which the Bank of England is also acknowledging. This supports further BoE rate cuts, and ultimately weighs on the pound.”

Mangwiro also noted that in his view, de-dollarization risks seemed “over-blown.”

“Sentiment will likely reverse as US growth outlook rebounds and corporate earnings remain resilient,” he said. “Along with current extreme short USD positioning, this should support a USD rebound, dragging Cable lower.”