By James Tucker
This week, the US dollar broadly held the upper hand against both sterling and the euro as markets continued to favour the US economy and expectations that US interest rates could stay higher for longer. Stronger demand for the dollar kept both major European currencies under pressure.
Sterling against the US dollar spent much of the week trading within a relatively tight range. Softer UK business activity data briefly weighed on the pound, but losses were limited as traders balanced weaker UK data against broader global market sentiment. Political developments in the UK added some background uncertainty but did not trigger major currency moves.
The euro had a more difficult week against the US dollar. Concerns over weaker eurozone economic momentum, combined with the Federal Reserve’s relatively firm policy outlook, left the single currency under sustained pressure, with it touching its weakest level against the dollar in around a year during the week.
Sterling had a mixed week against the euro. After coming under pressure early on following softer UK inflation and a cautious tone from the Bank of England, the pound recovered as political uncertainty eased and the euro struggled to find support. By midweek, sterling had climbed back towards recent highs against the single currency, showing resilience despite a challenging domestic backdrop.
However, there are reasons to believe the pound’s recent strength may be running out of steam. Much of this week’s rally was driven by short-term political developments rather than improving UK economic fundamentals. Markets are becoming increasingly focused on weaker UK growth, slowing services activity and expectations that the Bank of England has limited scope to keep interest rates elevated.
Looking ahead, the balance of risks appears to be tilting against sterling. If incoming UK data continues to disappoint, or confidence in the UK’s fiscal outlook weakens, the euro could begin to regain ground. While sterling has outperformed the euro recently, it may struggle to hold those gains without stronger economic data to support it, leaving the pound vulnerable to a period of consolidation or a gradual move lower against the single currency. As always keep in close contact with your currency consultant to help you get the most out of your money.