FX Weekly Outlook: GBP Holds Ground Amid French Political Headwinds

The pound is holding firm
Sterling began the week on softer ground after a cabinet reshuffle in Westminster, triggered by the resignation of the Deputy Prime Minister. Political uncertainty has always been a thorn in the pound’s side, and headlines around fiscal policy and bond market volatility have added to the noise. Yet, despite the drama, the pound is holding firm where it matters most, above the long-established support levels that have anchored its trading range throughout 2025.

This resilience tells an important story. Against the euro, sterling remains vulnerable to domestic headlines, but it is far from breaking down. Against the dollar, softer U.S. labour data has created breathing space, leaving the pound steadier and in some cases firmer. For businesses navigating international payments, this mix highlights a familiar pattern: short-term volatility is driven by politics, but the underlying ranges remain intact, and that means opportunities as well as risks.

Sterling’s slide against the euro last week was more measured than dramatic. GBP/EUR dipped to around 1.15, but crucially remains well above the 1.1420 support level that has held firm all year. That support matters: every bout of weakness so far in 2025 has stopped short of breaching it, and the pound has repeatedly bounced back into its longer-term trading band.

For euro buyers, the context is important. The average exchange rate this year sits closer to 1.1785, so today’s levels are weaker, but not alarming. When UK politics generates noise, from cabinet reshuffles to debates about tax policy, sterling tends to dip. But as long as that 1.1420 floor holds, the story is one of range trading, not collapse.

Put simply: businesses buying euros should not panic. Current levels are below trend but well within the pound’s comfort zone, and any near-term weakness often presents tactical opportunities to secure better rates.

This week’s biggest risk event may come not from London but Paris. French Prime Minister François Bayrou faces a confidence vote that could see him ousted less than a year into office.

If Bayrou loses, the euro would likely weaken as investors respond to political instability in the eurozone’s second-largest economy. The immediate reaction would probably be a sell-off in French equities and bonds, with the euro slipping one to three percent in the short term. That would mean EUR/USD retreating from the 1.17 area back toward 1.16, and GBP/EUR nudging higher into the 1.16-1.1650 range, welcome news for UK corporates buying euros.

If Bayrou survives, and this looks unlikely given the mainstream news reports, the euro would stabilise, but the underlying challenges remain. France’s debt burden, deficit levels and fractured politics still pose long-term risks. Markets may breathe a sigh of relief in the short run, but the structural problems won’t disappear overnight.

For euro buyers, this is an environment where patience could pay off. The vote introduces downside risks for the single currency, which may create more favourable entry points for sterling holders in the coming days.

Against the dollar, the pound is in steadier shape. GBP/USD is trading around 1.3515, helped by U.S. labour market data that fell well short of expectations. August’s payrolls showed just 22,000 new jobs, while unemployment rose to 4.3%. For the Federal Reserve, this was a clear signal that the labour market is cooling, and markets now expect another interest rate cut at the September 16-17 meeting.

The debate has shifted from whether the Fed will cut to how much. Some traders are even speculating about a larger 50-basis-point reduction. This dovish tilt has kept the dollar on the defensive and allowed sterling to hold near the top of its recent range. For analysis of how dovish Fed signals impact currency markets, see our guide to Fed dovish tone effects.

The key risk this week is Thursday’s U.S. inflation release. A softer reading would likely extend dollar weakness, pushing GBP/USD toward the upper end of its 1.34-1.36 band. A hotter print, however, could spark a rebound in the dollar, trimming sterling’s gains.

In the UK
Political headlines will continue to drive sentiment, but Friday’s GDP release is the real data test. Economists expect little to no growth in July after a stronger-than-expected June. Manufacturing figures may provide a bright spot, but fiscal worries and the upcoming November budget remain bigger themes in the background.

In Europe
The French confidence vote today is the clear focal point. Later in the week, the European Central Bank meets, with markets expecting no change to interest rates. Even so, commentary from Christine Lagarde will be watched closely for signals about how the ECB views growth and inflation risks.

In the U.S.
Inflation dominates the agenda. Thursday’s CPI release will set the tone for the dollar ahead of the Fed meeting. If inflation surprises on the upside, markets may scale back aggressive rate-cut bets, handing the dollar some relief. If it comes in softer, the greenback’s recent weakness could extend further.

For UK businesses managing FX exposure, this week’s market backdrop is a classic case of short-term volatility within longer-term ranges.

- Euro buyers: The French vote introduces downside risks for the euro. If the government falls, sterling could strengthen toward 1.16-1.1650, improving buying levels. Even if the government survives, France’s structural problems remain, meaning the euro may struggle to gain lasting strength.
- Dollar buyers: Current GBP/USD levels around 1.3515 are supported by Fed dovishness, but Thursday’s CPI data could swing sentiment sharply. Consider partial hedging to take advantage of today’s relatively firm pound while keeping flexibility for later opportunities.

The overarching message is one of balance. Sterling remains supported above its key floors, the euro faces political tests that could undermine it, and the dollar is under pressure from Fed easing expectations. This is not a crisis environment but one that rewards measured execution and disciplined risk management.

The pound is once again proving resilient in the face of political noise at home. Against the euro, support levels remain intact, and French politics may even tilt the balance in sterling’s favour this week. Against the dollar, the Fed’s dovish turn is keeping the pound steady, though U.S. inflation data looms as a test.

For corporates, the focus should be on patience and tactical positioning rather than rushing into trades. The ranges that have defined 2025 remain in place, but this week’s events, especially in Paris and Washington, could provide windows to lock in advantageous levels.

As ever, staying informed and acting selectively will help businesses navigate the currency market with confidence.