Weekly FX Roundup: Sterling’s Strength Fades as Reality Bites

Sterling’s early-week momentum didn’t last. After breaking into the 1.15 level against the euro, its strongest level since July, the pound has slipped back below the 21-day moving average and is quickly heading toward that crucial support zone we have highlighted before at 1.1410 to 1.1420. 

This end-of-week decline is exactly as we projected in Monday's outlook, where we warned of sterling's fragility and fiscal pressures.

The move higher was not built on UK strength. It was driven by temporary euro weakness as France’s political turmoil unsettled investors. For our earlier analysis of this dynamic, see our outlook on sterling's rise as France faltered. Now that fears of a snap election are fading, the euro has regained some stability, and the pound’s support looks increasingly fragile. 

The latest business survey from the British Chambers of Commerce paints a bleak picture. Confidence is flatlining, inflation concerns are rising, and only 48% of firms expect turnover to increase over the next year. Tax and inflation top the list of business concerns, a clear reflection of how higher costs and policy uncertainty are eroding momentum. 

The government’s November 26 Budget is now the defining risk. The Office for Budget Responsibility has already warned of weaker productivity and a widening fiscal gap. With spending cuts politically off-limits, higher taxes are inevitable. Markets know it. Businesses feel it. And that is why sterling’s strength is not sustainable. 

J. Safra Sarasin remains bearish on the pound, warning that weakening growth prospects and fiscal tightening will continue to weigh on sentiment. The pound’s three-day slide against the dollar confirms that view. GBP/USD has fallen from 1.35 to near 1.32, its lowest level in two months. 

For the Bank of England, the message from the data is complex. Inflation remains sticky, and Chief Economist Huw Pill has stressed that the fight against price pressures must come first. But rising concern among businesses about inflation, now at its highest since early 2024, leaves the BoE with little room to cut rates without undermining credibility. 

Growth is slowing, policy is constrained, and fiscal credibility is in question. That is not a recipe for sustained currency strength. 

The euro’s early-week weakness stemmed from political drama in France. Prime Minister Lecornu’s resignation rattled markets and widened yield spreads between French and German bonds. But with President Macron now expected to appoint a new Prime Minister and avoid snap elections, fears of systemic risk have eased. 

The euro has recovered modestly against sterling, though less so versus the dollar. Even so, investors still view it as the steadier hand in a fragile market. But this is not confidence; it is containment. Europe’s core economies remain sluggish, and while France’s political storm may be settling, the fiscal cracks beneath it have not disappeared. 

Commerzbank notes that developments in France could remain a latent burden on the euro, particularly if new spending commitments push debt levels even higher. Still, compared with the UK’s fiscal drift, the eurozone looks composed. Policy predictability, even without growth, continues to act as a stabiliser. 

The U.S. dollar has posted its best weekly gain in almost a year, up more than 1.5% on the DXY index. With the U.S. government still in shutdown and official data releases suspended, traders have been forced to rely on sentiment and positioning. 

According to MUFG, much of the dollar’s strength is mechanical, driven by short positions being closed rather than new optimism. Still, the move has momentum. As Société Générale’s Kenneth Broux put it, “the reversal in the dollar at the start of Q4 is forcing investors to reverse short positions.” 

That dynamic has pulled GBP/USD lower and kept EUR/USD around 1.1560. With Fed minutes due and Chair Powell scheduled to speak, markets are recalibrating expectations. Two more rate cuts are still priced in before year-end, but traders are starting to question whether that is realistic. 

Until the shutdown ends and data resumes, the dollar’s advantage lies in one thing: it remains the clearest safe haven in a noisy market.

Strategic View: Relative Strength Isn’t Real Strength 

Sterling’s rally this week looked encouraging on the surface but lacked substance underneath. It was not a vote of confidence in the UK economy; it was a temporary reprieve from euro weakness. As the French situation stabilises and UK fiscal risks grow, that advantage is fading fast. 

For businesses and investors, this is a time for composure, not conviction. Lock in favourable rates while they last, manage exposure across currency pairs, and prepare for renewed volatility as November’s Budget approaches. 

Markets reward clarity and discipline. The UK currently offers neither. Until that changes, sterling’s strength will remain relative, not real.