Pound’s rally stalls as political uncertainty weighs on sterling
The British pound’s impressive ascent, which had lifted GBP/USD by as much as 12.8% from this year’s low point, came to an abrupt end last week as the Labour government’s political troubles eroded confidence in the UK currency.
The exchange rate retreated from its highest level in four years, slipping by 0.7% over the week. Sterling also weakened against most of its major counterparts. Among the more pronounced declines were GBP/CAD, which dropped 0.7%, and GBP/EUR, falling by 0.5%.
The pound could be in for further challenges in the days ahead, with traders increasingly cautious in the run-up to Wednesday’s deadline for US tariffs. US President Donald Trump announced a 90-day pause to his tariff scheme, set to lapse on 9 July. Last week, he indicated that a collection of letters detailing the revised tariff measures would be dispatched to trade partners on Monday.
Although the United Kingdom and the United States have already established a trade deal, any surge in volatility across global markets could prove detrimental to the pound, given its sensitivity to shifts in risk appetite.
9th July comes into focus
After Thursday’s encouraging labour market data gave the dollar a lift, optimism quickly faded later in the day, on the eve of Independence Day, when President Donald Trump confirmed that his administration would start dispatching official letters to trading partners. These communications are intended to set out the unilateral tariff rates planned to come into force on 1 August, with the widely discussed 9 July deadline now fast approaching this Wednesday.
President Trump had originally announced these steeper so-called “reciprocal” tariffs on 2 April, though he delayed enforcement by 90 days to allow time for discussions, provisionally setting a 10% base rate.
He has frequently warned that failing to secure agreements by the deadline would result in automatic tariff increases. This has raised the pressure on trading partners who are working to complete negotiations in time. Even so, a growing number of analysts consider the deadline more flexible than fixed, interpreting it as part of the president’s familiar negotiating tactics.
Adding to this more conciliatory tone, Treasury Secretary Scott Bessent disclosed over the weekend that countries unable to conclude an agreement by 9 July could be offered an additional three weeks to continue talks. His remarks contrast sharply with the more combative approach usually favoured by President Trump, offering a glimpse into a more layered negotiation strategy.
Euro edges higher as sterling falters on policy concerns
The euro ended the week on a stronger footing against the British pound on Friday, with EUR/GBP advancing by 1%. Lingering worries over the UK’s fiscal outlook and fresh political uncertainty weighed heavily on sterling after developments earlier in the week.
The euro received an additional boost following Bank of England Governor Alan Taylor’s address at the London School of Economics. He highlighted increasing downside risks as 2026 approaches, pointing to receding inflation and signs of economic slack. His remarks in favour of more forceful interest rate cuts added to the growing pessimism surrounding the pound.
In contrast, EUR/USD ticked up by 0.5%, though the move was more restrained as underlying conditions turned less supportive for the euro. Robust US labour market figures last week dampened expectations of Federal Reserve rate reductions, reopening interest rate gaps in favour of the dollar and limiting further gains for the common currency.
Looking ahead
As the 9th July deadline approaches, currency markets look set for further turbulence. Even so, it seems unlikely that EUR/USD will stage a decisive move above 1.18 in the coming days, unless trade frictions suddenly intensify, which does not appear likely for the moment. With few significant data releases scheduled, trade negotiations and the tone of related developments are set to remain the primary forces shaping the dollar’s trajectory and influencing wider currency market trends throughout the week.
On the economic calendar, there is little of note in the pipeline. The NFIB Small Business Optimism Index will be worth monitoring, given that smaller enterprises are expected to feel the greatest impact from tariffs. Investors will also be watching the FOMC minutes for any fresh indications about the direction of monetary policy, although it is probable that policymakers will stick to their familiar cautious stance.
UK GDP data is scheduled for release this week. The Office for National Statistics (ONS) will publish the GDP monthly estimate for May 2025. The most recent data, released on 12 June 2025, indicated that UK GDP contracted by 0.3% in April 2025, following a 0.2% increase in March. In the euro area, retail sales figures are due today and could add to the recent run of subdued economic reports from the bloc. However, trade news is likely to command the most attention and set the agenda as markets head into next week.
