07 July 2025

GBP

Sterling extended its rally last week, with GBP/USD climbing to near four-year highs, largely on the back of broad-based dollar weakness. However, the pound’s ascent was interrupted midweek by a sharp selloff, triggered by renewed domestic political uncertainty. UK gilts came under pressure, and GBP/EUR fell to its lowest level since early April.

The catalyst was a tense Prime Minister’s Questions session on Wednesday, where Chancellor Rachel Reeves appeared visibly unsettled. Keir Starmer’s refusal to confirm whether she would remain in her role until the next election, coupled with his unwillingness to rule out tax increases, unsettled markets already wary of fiscal backtracking. Although Downing Street later reaffirmed Reeves’ position, the episode highlighted the fragility of investor confidence in the UK’s fiscal trajectory.

Looking ahead, the UK calendar is relatively light until Friday, when GDP, Industrial Production, and Manufacturing Production data are due. Until then, sterling is likely to remain reactive to external developments, particularly any shifts in US trade policy or broader risk sentiment. The Bank of England’s Deputy Governor Sarah Breeden is also due to speak on Thursday.

EUR

The euro continued to benefit from a favourable macro and policy backdrop, with EUR/USD peaking at 1.1830 before easing slightly. The pair remains up around 15% year-to-date, supported by growing investor preference for EU assets and a perception of relative policy clarity from the European Central Bank.

Last week’s European Central Bank Forum in Sintra reinforced this narrative. While central bankers across the Federal Reserve, Bank of England, and European Central Bank acknowledge the elevated uncertainty clouding the global outlook, their policy responses have diverged.

The ECB has continued its rate-cutting cycle, albeit cautiously, in contrast to the Fed’s more hesitant stance. This divergence has helped underpin euro strength, though any shift in investor sentiment, whether due to geopolitical developments or changes in the macro narrative, could reverse this trend.

The forum also touched on the dollar’s reserve currency status. While there was consensus that no immediate alternative exists, the fact that the conversation is gaining traction is noteworthy. For now, the euro remains a beneficiary of the dollar’s wobble, but the path forward is far from guaranteed.

USD

The US dollar remains under pressure, with last week’s activity reflecting a market increasingly uneasy with the country’s fiscal and political trajectory.

The key development was President Trump’s signing of the “One Big Beautiful Bill”. The bill is a sweeping tax and spending package that revives many of his first-term policies. While it has passed Congress and was signed during Independence Day celebrations, markets remain sceptical.

The Congressional Budget Office estimates the legislation will add $3.3 trillion to the federal deficit over the next decade, while simultaneously cutting healthcare and food support for low-income Americans. The bill also includes $150 billion in new defence spending and another $150 billion for border enforcement, financed through cuts to social programs - a structure that has raised concerns about long-term economic sustainability.

Compounding the uncertainty are renewed tensions between Trump and Fed Chair Jerome Powell. The President’s public criticism of the Fed’s decision to hold rates steady and his push to replace Powell early has added a layer of political risk to monetary policy expectations. Markets will remain alert to any developments here, as changes in Fed leadership could materially alter the policy outlook.

This week, attention turns to the deadline for potential US trade deals on Wednesday 9 July. Markets are hoping for clarity, but an extension and the potential continued uncertainty remains a possibility. The release of the FOMC minutes on Wednesday is unlikely to offer much new guidance, though any signs of internal dissent could impact market sentiment. Thursday brings the usual Unemployment Claims data.

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.