GBP in Focus: Currency Market Outlook 4th September 2025

The pound has had a volatile start to September, caught between domestic fiscal worries, political uncertainty in Europe, and shifting expectations for US monetary policy. Yet for all the noise, the currency remains within well-defined ranges, with no sign of an imminent breakdown. For corporates buying euros or dollars, the near-term outlook presents both challenges and opportunities, but panic is not warranted.

Sterling has been under pressure this week, with GBP/EUR dipping into the 1.14 level on Tuesday after the UK led a global bond sell-off. Concerns over rising government borrowing costs, speculation about substantial tax rises in the upcoming November budget, and the perception that fiscal risks are mounting have weighed on sentiment. GBP/USD also slipped, touching 1.3366 before recovering to the mid-1.34s.

Since then, a rebound in global bonds and softer US labour market data have allowed the pound to stabilise. GBP/EUR has recovered to 1.1540, while GBP/USD is holding in its 1.34-1.35 range. The immediate pressure has eased, and analysts note that while sterling is vulnerable to headlines, the structural picture is one of consolidation rather than collapse.

For euro buyers, the pound remains comfortably within its expected trading band. Support near 1.1420 has not been broken this year, even in moments of stress, and current levels sit well above the 2025 low. The longer-term average is close to 1.1785, which means today’s 1.15 is below trend but not alarmingly so.

This suggests no urgent need for corporates to panic. The balance of probabilities points to GBP/EUR continuing to oscillate between 1.15 and 1.18 until clearer catalysts emerge. French political risk remains a potential headwind, with Prime Minister François Bayrou facing a confidence vote on 8 September, but this is unlikely to trigger a 2010s-style euro crisis. Instead, it may simply add to short-term volatility.

The euro itself is wrestling with competing forces. On one hand, policymakers at the European Central Bank, including Olli Rehn, have warned there is “no room for complacency” on inflation, highlighting downside risks from cheaper energy, a stronger euro, and subdued service-sector price growth. ECB economists have also flagged that escalating US-China trade tensions could divert cheap Chinese goods into Europe, further weakening inflation. These dynamics support a dovish narrative and could limit euro upside.

On the other hand, Eurozone data has not been uniformly weak. The August PMI surprised to the upside at 51.1, pointing to resilience in both services and manufacturing, while service-sector price pressures edged higher. Traders now see just a five per cent chance of an ECB rate cut in September. This mixed backdrop means the euro may find it hard to gain sustained strength, particularly against sterling, where French political risk offers a partial offset.

One factor to keep an eye on next week is the confidence vote in France on September 8. Polls suggest around 70% of French voters want Prime Minister François Bayrou to lose, which has raised the risk of government instability. Markets are already showing nerves: French equities fell sharply when the vote was announced, with bank shares dropping as much as 8–10%, and French 10-year bond yields climbed to their highest level since March at 3.52%.

ECB President Christine Lagarde has acknowledged that political shocks in major eurozone economies can affect financial markets and borrowing costs. If Bayrou’s government were to fall, the euro would likely come under pressure as investors react to the increased fiscal uncertainty and wider sovereign risk. Analysts suggest a moderate but meaningful impact - potentially a 1–3% decline - especially if no stable replacement government emerges quickly or if fiscal reform debates drag on.

For corporates buying euros, this matters because political risk in France adds another reason why the euro may struggle to build lasting strength. While the currency has often proven resilient to national politics, France’s size and debt position make this a more systemically important case. The bottom line: political noise could offer windows of opportunity to transact at softer euro levels, even if the broader EUR/GBP range remains intact.

Across the Atlantic, the dollar is softening as expectations of a Federal Reserve rate cut grow stronger. Job openings data this week showed fewer vacancies than unemployed workers for the first time since 2021, reinforcing the view that the labour market is cooling. San Francisco Fed President Mary Daly has said policymakers are preparing to cut “soon,” while Governor Christopher Waller has left the door open to a larger move if weakness persists.

Although the Fed’s preferred inflation gauge, the core PCE index, rose to 2.9 per cent in July, markets see this as a temporary effect of tariffs. As a result, EUR/USD has climbed to 1.17 and GBP/USD has stabilised around 1.3440. For corporates buying dollars, this creates a tactical window to transact at better levels, though Friday’s US payrolls report could quickly shift sentiment if the data surprises to the upside.

The near-term drivers for the currency market are clear. Friday brings the all-important US non-farm payrolls report and average hourly earnings data, which will be decisive for Fed expectations and the dollar. In Europe, retail sales released this morning and Eurozone GDP on Friday will provide a snapshot of consumer demand and growth momentum. In the UK, retail sales due tomorrow will offer another measure of household resilience, while the 26 November budget looms large in the background.

For corporates, the message is one of balance. The euro remains capped by political and inflation risks, the dollar is on the defensive ahead of labour data, and sterling is weak but supported within its long-term range. GBP/EUR at 1.1540 is not a crisis level but a reminder of how fiscal uncertainty and bond market nerves can weigh on the pound. Unless support at 1.1420 gives way, there is no sign of a structural breakdown.

Sterling is stabilising after a turbulent start to the month, the euro faces risks from both inflation dynamics and French politics, and the dollar is softening ahead of US jobs data. For corporates selling GBP and buying EUR or USD, the environment offers tactical opportunities, not reasons to panic.

For euro buyers especially, the key message is reassurance. The pound remains well supported within its established range, the 1.1420 level has held firm throughout 2025, and current levels are comfortably above the lows. Political risks in France may even work in your favour, softening the euro in the near term. There is volatility ahead, but no sign of a structural crisis. Measured execution, not rushed decisions, remains the smartest approach.