Sterling: Balancing on a knife-edge

Sterling remains finely balanced between weak public finances and shifting investor sentiment. With the UK’s Budget announcement drawing closer, markets are watching carefully to see whether the government can present a fiscal plan that is both credible and sustainable. Failure to deliver could weigh heavily on the pound, especially against the dollar where recent gains have been difficult to secure.

On a trade-weighted basis, sterling’s overall movement has been muted in the past year, though the detail tells a more complex story. The euro has strengthened against the pound as confidence in the Eurozone improves and inflationary pressures subside, attracting capital away from Britain. By contrast, since early 2025 sterling has gained against the dollar, reflecting resilience in UK assets and shifting expectations for United States monetary policy.

The forthcoming Budget is likely to be decisive. A convincing demonstration of fiscal discipline may stabilise the pound, while any sign of weakness could expose fresh vulnerabilities. For now, sterling continues to tread a narrow line between confidence and fragility.

EUR: rally losing energy

The euro ended last week just above 1.17 against the dollar, down slightly after a run of stronger American data suggested that the United States economy may be regaining momentum. Earlier in the week, the single currency had found support from political uncertainty in Washington, although this effect proved short-lived.

If the funding dispute in the United States is resolved, attention will quickly return to fundamentals. A consistent run of strong American data could push EUR/USD towards 1.1650 and potentially lower, with little technical support until 1.14. For a more lasting correction, investors will want clear evidence that the American economy is not merely steadying but outperforming. Without that, the euro risks losing the limited momentum it has left.

Within the Eurozone, the focus this week turns to confidence surveys and inflation readings. These figures will be scrutinised, although they are unlikely to take centre stage in driving the currency in the short term.

USD: politics and data shaping sentiment

The United States dollar began the week on weaker ground as investors considered the possibility of a government shutdown while preparing for a heavy schedule of data releases. With the fiscal year about to close and no agreement yet on funding, parts of the federal administration could be forced to suspend operations. President Donald Trump is expected to meet congressional leaders in a last-minute attempt to avoid disruption, but the uncertainty is weighing on the currency.

Markets are also looking to September’s labour market reports, including non-farm payrolls, job openings, and private sector hiring, alongside the ISM manufacturing survey. These results will be crucial in shaping expectations for future Federal Reserve policy. Data last week reduced the likelihood of deeper interest rate cuts, giving the dollar firmer ground. Traders are now anticipating roughly 40 basis points of easing by year end, less than had previously been expected.

Recent inflation figures showed modest increases in both income and spending, suggesting consumers remain resilient. With price growth close to 3 per cent, above the Federal Reserve’s 2 per cent target, the scope for aggressive rate cuts is limited. For the time being, the dollar’s course is likely to be set by the interplay of political developments and the strength of incoming data.

Looking ahead

This week brings several pivotal moments. In the UK, the Budget will provide the clearest test yet of the government’s fiscal credibility. In the Eurozone, confidence and inflation figures will offer further context, though the euro remains most influenced by developments across the Atlantic. In the United States, employment data and political uncertainty will dictate sentiment. Investors face a period where politics, policy, and economic performance all converge to steer the direction of the major currencies.