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It was a sea of red on the charts for sterling yesterday as the pound dropped to its lowest since June against both the US dollar and the euro.
Sterling has lost close to 3% against the US dollar over the past month, but it’s not the only one, and the fall in GBP/USD seems as much about dollar strength as sterling’s weakness. The euro has also struggled against the dollar, while the pound-to-euro rate has barely moved.
The reason sits largely on the other side of the Atlantic. Recent US economic figures have proved stronger than expected and markets are taking seriously the possibility of further interest rate rises from the Federal Reserve. Higher US borrowing costs have helped pull money towards the dollar and left both sterling and the euro on the back foot.
On the data front, there have been mixed messages from Europe’s largest economy. German business confidence, recorded in the Ifo Business Climate Index, came in ahead of expectations and at its best since May 2023. But something needs to cheer up the German public, as the GfK Consumer Confidence Index showed the public’s mood turning more sour, at -30.6. The equivalent reading in the UK also came out overnight too, but sharply different at -13. The British public’s general economic outlook was at its highest level since August 2024, while the mood around personal finances reached an eight-month high.
In the business world, the world’s two biggest economies bought themselves more time yesterday. Donald Trump and Xi Jinping agreed to extend the US-China trade truce by two months, but the summit produced few signs of a wider breakthrough on the thorniest issues dividing Washington and Beijing. Tariffs, technology and rare-earth supplies remain on the to-do list.
The next question on the currency markets is whether the dollar can keep its advantage. US interest-rate expectations remain important, but oil prices and incoming economic data could quickly alter the picture. Next week we’ll be getting European and US inflation data midweek.
GBP: Dollar strength weighs on the pound
The pound has spent much of this week losing ground to the US dollar, while the story against the euro has been much quieter. It’s a relatively quiet week for data, but we’ll have the Labour Party Conference in Liverpool. What party members want to hear may vary from what the markets want to hear, so it will be interesting to see if the pound comes away unscathed.GBP/USD: the past year
EUR: German recovery offers some support
The euro has fared better against sterling than against the dollar this week. Germany helped its cause yesterday when business confidence rose more strongly than expected, adding to signs that the country’s long-awaited recovery may finally be gaining. That does not remove the wider challenges facing Europe, particularly high energy costs, and next week the inflation figures will be closely watched.GBP/EUR: the past year
USD: Dollar ends the week on top
The dollar has been the strongest of the three major currencies we follow this week. Stronger US data and expectations for higher interest rates have combined to push it higher against both sterling and the euro. That makes the next batch of American data particularly important, including inflation expectations, GDP and Non-Fram Payrolls next week. If the US economy keeps outperforming, markets may continue to expect higher rates and the dollar could remain well supported. Any signs of a slowdown, or a change in tone from the Federal Reserve, could quickly challenge that view.USD/GBP: the past year
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