Sterling starts the week close to its best levels of 2026 against both the dollar and the euro. A retreating US dollar and resilient UK growth have combined to lift GBPUSD to three-month highs, while GBPEUR holds firm near one-year highs as the Bank of England’s rate advantage over the European Central Bank continues to support the pound. Here is what is driving the move, and what to watch next.
Dollar retreat lifts GBPUSD to three-month highs
GBPUSD has climbed to its strongest level in three months after July’s US non-farm payrolls report came in negative and June’s figure was revised sharply lower. The weaker labour market data led investors to push back expectations for the next Federal Reserve interest rate move, with markets now leaning towards a later hike than previously priced. Soft US producer price data in the days that followed reinforced that shift. Wednesday’s minutes from the Federal Reserve’s July meeting will be watched closely for any sign of how divided policymakers were, and could influence the dollar’s direction for the rest of the week, though as ever any outcome remains a possibility rather than a certainty.
Resilient UK growth keeps the Bank of England on a hawkish footing
UK growth figures released in the middle of last week showed the economy performing better than many analysts had expected, extending a run of data that has surprised policymakers to the upside this year. The Bank of England held interest rates at its last meeting and has continued to sound cautious about cutting further while inflation remains above target. That combination, resilient growth and a central bank reluctant to ease, has kept UK yields attractive relative to peers, a key support for sterling. This week’s employment, wage and inflation data will be closely watched for whether that picture holds.
Euro finds some footing after the ECB’s surprise hike, though the rate gap still favours sterling
The European Central Bank delivered a surprise interest rate increase in June in response to inflation pressures linked to the conflict in the Middle East, its first hike in several years, and has held rates steady since. Even so, the policy rate gap between the UK and the eurozone remains close to one and a half percentage points in sterling’s favour, which continues to explain much of GBPEUR’s resilience. The pair has eased back slightly from its one-year high reached in July as the euro found some support, but sterling’s yield advantage remains the dominant driver for now.
The week ahead
- Tuesday: UK employment and wage data
- Wednesday: UK CPI, plus minutes from the Federal Reserve’s July meeting
- Thursday: US weekly jobless claims
- Friday: UK retail sales, plus flash PMIs across the UK, US and eurozone
With a busy week of UK data ahead, alongside Wednesday’s Federal Reserve minutes, now may be a good time to speak with your currency specialist about how these developments could affect your currency requirements.
