Sterling drifts lower as dollar strength overshadows modest euro gains

Sterling has lost ground in recent weeks, with July proving particularly testing for the pound. Against the US dollar, it has shed more than 3 percent this month, breaking decisively below its 100-day moving average — a technical level it had held above for much of the year. This signals a potential shift in momentum as the dollar continues to gather strength across the board.

Earlier in 2025, sterling had enjoyed support from a relatively stable UK economic backdrop, favourable yield differentials, and a period of political calm. Yet those tailwinds have eased, and the pound has come under pressure. Its recent decline mirrors moves in the euro, as both currencies have faltered in the face of a resurgent greenback.

The connection between sterling and the euro remains tight, with GBP/USD and EUR/USD showing high correlation due to the deep economic ties between Britain and the EU. As a result, the pound has not only weakened against the dollar but has also tracked closely with the euro’s performance. That said, this hasn’t stopped sterling from clawing back some ground against the common currency — rising by around 1.3 percent this week alone.

With fewer major UK data releases on the immediate horizon, the pound may find a temporary reprieve. Broader risk appetite appears to be stabilising, and ongoing euro weakness could give sterling a relative advantage. However, the calm may not last. As attention shifts towards the upcoming Autumn Budget, concerns over fiscal policy and government spending could come back into focus. Any signal that points to divergence from market expectations, or hints at fiscal strain, might weigh on the pound — particularly if accompanied by weaker macro data or renewed political uncertainty.

 

Dollar surges on robust US data and a hawkish Fed tone

The US dollar has surged to a two-month high, lifted by a combination of upbeat economic figures and unexpectedly firm messaging from Federal Reserve Chair Jerome Powell. The dollar rose 1 percent in a single session and has gained 2.5 percent over the past five trading days — marking its strongest five-day run since September 2022.

The key catalyst was the second-quarter GDP release, which came in well ahead of expectations at 3 percent annualised growth. However, a closer look at the details reveals a more nuanced picture. A sharp fall in imports meant that net trade contributed significantly to the overall figure — adding as much as five percentage points to the headline number. This effect flatters the data, similar to how an import-driven build-up in Q1 had depressed the previous quarter’s figures. Averaging the two periods gives a clearer sense of momentum, with growth running closer to 1.25 percent — still below the Fed’s estimate of the economy’s long-term potential.

Stripping out the impact of trade and inventories, real final sales to domestic purchasers — a key gauge of domestic demand — rose just 1.3 percent in the first half of the year. This underscores the modest pace of underlying activity despite the headline strength.

While the Fed’s formal statement maintained a dovish undertone — including dissent from Governors Bowman and Waller, both seen as politically aligned with the current administration — Powell struck a more forceful note in his press conference. He made clear that the Fed is prepared to look through short-term tariff-related fluctuations, hinting that rate hikes are not off the table if inflation risks persist. The reaction was swift: expectations for a September rate cut were scaled back, equity markets fell, Treasury yields climbed, and the dollar pushed higher.

Powell reaffirmed the Fed’s commitment to a data-led approach, balancing the need to support growth while containing inflation. While comments from other members of the committee or even President Trump may follow in the coming days, it is likely that incoming economic data will set the tone as the Fed heads towards its 17 September meeting.

 

Euro fades as solid US data eclipses trade headlines

The euro lost further ground against the dollar yesterday, as firm US GDP data and Powell’s hawkish tone combined to drag EUR/USD through its 50-day moving average — a key technical level that had supported the euro’s rally earlier this year. The pair closed below this marker for the first time since that uptrend began, with the move gathering pace into the New York session.

Interestingly, the markets largely ignored news of new US tariffs — including a 25 percent duty imposed on Indian goods — that might have shaken confidence in the dollar just a few months ago. This highlights how dominant the macroeconomic narrative has become in driving currency markets, particularly in EUR/USD.

Even solid eurozone data failed to change sentiment. The latest GDP reading came in slightly above expectations at 0.1 percent, but the detail was mixed: Germany and Italy saw modest contractions, while France and Spain offset those declines. German bunds rose briefly following the release, but gains were quickly reversed as investors digested the broader economic picture.

With the euro struggling to respond to positive regional data and the US dollar continuing to find support, the path of least resistance for EUR/USD appears lower. Barring a significant downside surprise in upcoming US data or the implementation of severe new tariffs, the euro is unlikely to regain momentum in the near term.

Immediate support sits near 1.14, but if that level gives way, the next significant floor lies closer to 1.12. For now, euro traders may remain on the defensive.