Pound Retreats as Oil, Borrowing Costs and a Hawkish Fed Strengthen the Dollar

Friday 24th July 2026 | Market Insights | Lamera Capital 

Sterling has fallen against both the euro and the dollar this week, despite this morning’s UK retail sales figures comfortably beating expectations. 

That reaction is worth paying attention to. 

When a currency falls despite stronger domestic data, it usually signals that wider global forces are having the greater influence. This week, those forces include rising energy prices, higher government borrowing costs, weaker equity markets and growing expectations that the world’s major central banks may need to raise interest rates again. 

UK retail sales rose by 1% in June, well ahead of forecasts, while annual growth increased to 4.2%. 

Under more settled market conditions, those figures might have supported sterling. They point to stronger-than-expected consumer demand and give the Bank of England another reason to avoid lowering interest rates. However, this has not been a settled week. Government bond yields have climbed, global stock markets have come under pressure and investors have become increasingly concerned about the economic consequences of renewed conflict in the Middle East. Markets are also questioning how the enormous sums being committed to artificial-intelligence infrastructure will be financed and whether the eventual returns will justify the investment. Against that backdrop, one positive set of UK figures was not enough to reverse the pound’s direction. 

Oil has moved back towards $100 a barrel as the conflict in the Middle East has widened and attacks on shipping have increased concerns about global energy supplies. 

Higher oil prices are inflationary for most economies. They raise transport, manufacturing and household energy costs and can eventually spread into wages and wider business pricing. The dollar, however, has several advantages in this environment. The United States produces a significant proportion of its own energy and is therefore less exposed than the UK and eurozone, both of which remain substantial energy importers. 

The dollar also tends to benefit when geopolitical uncertainty rises because investors view it as the world’s principal reserve and liquidity currency. 

At the same time, higher energy prices have pushed government bond yields upwards as markets consider whether central banks will need to respond with higher interest rates. That combination of rising US yields, weaker equity markets and increased demand for defensive assets, is supporting the dollar against both sterling and the euro. 

The Federal Reserve

The Federal Open Market Committee meets next week, with US interest rates currently held between 3.50% and 3.75%. 

Unlike earlier in the year, markets are no longer focused solely on when the Federal Reserve might cut rates. Investors are now actively considering whether the next move could be an increase. A July rise is not fully expected, but markets are assigning it a meaningful probability. September or October may still be the more likely starting point for renewed tightening, although a continued increase in energy prices could bring action forward. Recent comments from Federal Reserve policymakers have reinforced the shift. Officials have warned that monetary policy may need to be reconsidered if inflation does not begin to cool. The Fed has also moved away from providing detailed forward guidance, making each decision less predictable than markets had become accustomed to. 

For currency markets, the message is relatively straightforward. 

A rate increase next week, or a strong indication that one is approaching, would likely support US yields and the dollar. A more patient message, particularly if the Fed treats the oil-price increase as temporary, could allow some of the dollar’s recent gains to unwind. The FOMC meeting concludes on Wednesday 29th July. 

The ECB Held Rates, but Kept the Door Open 

The European Central Bank left its key interest rates unchanged on Thursday, maintaining the deposit rate at 2.25%. 

The ECB acknowledged that energy prices remain volatile and that the full inflationary effect of the latest shock has yet to pass through the eurozone economy. 

Markets continue to see a realistic prospect of another increase in September. However, that expectation was already largely reflected in market pricing before the announcement. As a result, the decision provided limited additional support for the euro. This explains why the euro has remained relatively firm against sterling but has struggled to advance against the dollar. The ECB maintained a sufficiently firm position to support the single currency, but it could not prevent a broader dollar rally being driven by US yields, energy prices and defensive demand. 

The Bank of England: 30th July 

The Bank of England announces its next decision on Thursday 30th July, with Bank Rate currently at 3.75%. No change remains the most likely immediate outcome. 

The UK economy is growing slowly and the labour market has softened, which argues against unnecessarily increasing borrowing costs. However, stronger retail sales and renewed energy-price pressure also make a rate cut difficult to justify. At its previous meeting, the Monetary Policy Committee voted by seven to two to hold rates, with two members preferring an immediate increase to 4%. The most important element next week may therefore be the Bank’s tone rather than the headline decision. 

If policymakers emphasise persistent inflation and the danger of higher energy costs feeding into wages and business prices, sterling could regain some support. 

If the Bank focuses more heavily on weak growth and the softer labour market, investors may conclude that UK rates will not rise as aggressively as currently priced. 

That could leave the pound vulnerable, particularly against the euro. 

In Summary, Sterling performed well earlier in July but has started to retreat against both the euro and the dollar as wider global concerns take over from stronger UK data. 

The dollar remains the strongest of the three currencies. Rising oil prices, higher borrowing costs and weaker equity markets are supporting demand for the US currency, while the possibility of further Federal Reserve tightening could push it higher again. 

The euro has regained some ground against sterling, helped by expectations that the European Central Bank will remain focused on inflation. However, it is still struggling against the dollar, which continues to benefit from safe-haven demand and the stronger US interest-rate outlook. 

For UK businesses, this means the more favourable levels seen earlier in the month have started to fade. Further rises in oil prices or a firmer message from the Federal Reserve could place additional pressure on sterling, while an easing in geopolitical tensions or improved market sentiment could help the pound recover. 

Businesses with upcoming currency requirements should therefore keep a close eye on developments rather than assume the earlier July levels will quickly return.