Sterling Under Pressure as Fiscal Risks and US Data Dominate

The British pound starts the week cautiously, with fiscal risks in focus. Political pressure at home is colliding with fiscal constraints, while the euro holds steady ahead of inflation data and the dollar awaits a critical run of U.S. releases. 
The Pound is still weak against the Euro but it has been holding on valiantly to a huge key support level. Against the Dollar the Pound has rebounded a touch from recent lows.

The Labour Party conference has put the government’s fiscal stance firmly in the spotlight. Ministers are urging Chancellor Rachel Reeves to relax her “iron-clad” deficit rules and expand spending, despite an existing £30bn gap ahead of November’s budget. Any sign of retreat from these rules risks unnerving bond markets and reawakening memories of the 2022 mini-Budget shock. For comprehensive analysis of sterling's structural challenges and fiscal risks, see our detailed pound outlook.

Gilt underperformance has already translated into a weaker pound. Analysts at Lloyds note that “GBP also lost ground to EUR… suggesting UK political risks were a market driver to some extent.” Meanwhile, the euro looks steadier as investors await national inflation prints from Germany, France and Italy, followed by Wednesday’s Eurozone flash estimate. A firmer outcome would underline the contrast between the ECB, which appears near the end of its easing cycle, and the BoE, which is still expected to cut rates in 2025.

For GBP/EUR, trading near a key support level, unless UK headlines improve, the path of least resistance remains lower.

Sterling has found some relief against the dollar after bouncing from recent lows, strong support levels that have underpinned the pair since May. The recovery eases immediate downside pressure, but rallies face stiff resistance while U.S. data risk dominates the outlook.

The dollar remains underpinned by resilience in the U.S. economy. Second-quarter GDP was revised up to 3.8%, the strongest pace in nearly two years, while Fed Chair Jerome Powell pushed back against aggressive rate-cut expectations. This week’s calendar is decisive: ISM manufacturing (Wednesday), ISM services (Friday) and non-farm payrolls (Friday) will set the tone. Any above-consensus surprise could trigger renewed dollar strength and drag GBP/USD back toward 1.33.

The euro has staged a modest rebound from last week’s low against the dollar, but the broader trend has softened. Last week’s break of a rising trendline signalled an end to September’s rally, leaving the pair vulnerable to fresh dollar gains.

The Eurozone’s inflation data will be pivotal. Spain’s CPI undershot expectations, hinting that Wednesday’s flash estimate could come in soft. Consensus points to a rise in headline inflation to 2.3% and core to 2.4%. A miss would weigh on the euro, particularly against a firm dollar.

At the same time, U.S. labour market data looms large. Markets expect just 39,000 jobs created in September. A stronger reading would reinforce the Fed’s cautious stance and put further downward pressure on EUR/USD.

The common thread across markets is vulnerability. Sterling remains captive to domestic politics and fiscal credibility. The euro is steadier but risks slipping if inflation data disappoints. The dollar holds the upper hand, with robust growth and sticky inflation giving it room to strengthen further if data surprises.

For corporates and investors, the message is balance and caution. GBP/EUR remains capped by euro resilience and UK fiscal risks, with support fragile. GBP/USD looks rangebound but prone to renewed weakness if U.S. data comes in strong. EUR/USD may struggle to hold gains without an upside surprise on inflation.

Volatility is set to remain high, and measured execution remains the best approach. Forward cover strategies can help businesses manage exposure as politics, policy divergence and U.S. data combine to keep currency markets unsettled.