Sterling Clings to Support Amid Fiscal Concerns

The pound slipped against all major peers on Tuesday — with the notable exception of the US dollar — as fresh figures showed the UK budget deficit had widened sharply. Public sector borrowing rose to £20.7 billion in June, £3.2 billion above expectations and £6.6 billion more than the same period last year. Despite this blow to the public finances, GBP/USD closed above its 50-day moving average, lifted in part by general dollar weakness.

The pair appears to have found a floor around the $1.34 level and is now eyeing a potential break above the 21-day moving average at $1.3575. Such a move could reignite confidence in the pound's 2025 uptrend, though a daily close below $1.35 risks trapping the pair in a tight $1.34–$1.35 range in the near term.

More broadly, sterling remains under pressure this month, with stubborn inflation and lacklustre data reigniting fears of stagflation. The latest borrowing numbers have added to speculation that Chancellor Rachel Reeves may be left with little choice but to raise taxes in the Autumn Statement to keep fiscal targets on track.

The UK’s fiscal outlook continues to draw scrutiny. The deficit now stands at 5.7% of GDP — the third highest among 28 advanced European nations — while public debt hovers at 94% of GDP. Meanwhile, the 10-year gilt yield has retreated from recent highs of 4.7% to below 4.6%, following the broader trend in global yields. This benchmark remains a key barometer for investor sentiment and confidence in the government’s ability to manage inflation and debt repayment.

Markets will now look to Thursday’s flash PMIs and Friday’s retail sales for a clearer sense of direction. These releases will be crucial in shaping expectations around the Bank of England’s next move, particularly as investors juggle weak economic momentum against persistent price pressures — a worrying combination for the pound’s outlook.

Dollar Drifts Lower as Fed Speculation Grows

The US dollar continued its downward drift this week, slipping beneath its 60-day moving average — a technical level it had consistently held since February. With yields softening and inflationary worries on the wane, attention is now firmly on the final trading days of July, which could mark one of the most decisive stretches of the third quarter.

Markets are increasingly anticipating a shift in tone at next Wednesday’s FOMC meeting, with expectations rising that dovish voices within the committee could start to steer the narrative. This growing sentiment has weighed heavily on the dollar, which as of midweek, is on track for its longest losing streak in nearly three weeks.

The dollar’s decline was accelerated on Tuesday afternoon after a weaker-than-expected Richmond Fed Manufacturing Index print — underscoring just how attuned investors have become to hard data over political noise. Yet during Wednesday’s Asian session, the greenback staged a modest recovery, buoyed by news of a trade deal struck between the US and Japan, which provided a supportive backdrop.

Euro Inches Higher Amid Fragile Calm

EUR/USD nudged higher this week, closing above its 21-day moving average for the first time since 14 July and reaching a two-week peak. While this move alone doesn’t confirm a sustainable uptrend, it does suggest there may be further upside potential in the short term.

On the intraday chart, the pair briefly eyed resistance at $1.1775 after clearing $1.1750, but failed to make further headway. The $1.1800 level remains the next key hurdle — a breach of which could open the door for a retest of early July’s year-to-date high of $1.1829.

However, risks remain for the euro. Much of this week’s 1% rise appears to have been fuelled by simmering trade anxiety ahead of the 1 August deadline. The US-Japan trade agreement, and the potential for others to follow, could further calm markets — likely capping further euro gains unless fresh dollar-negative catalysts emerge.

To convincingly push past $1.1800, the market may need more than a quiet political calendar; disappointing US data — such as weaker-than-expected weekly jobless claims or lacklustre durable goods orders — would probably prove more effective in lifting the euro.

For now, flash PMIs remain on the radar, but price action suggests investors are far more reactive to concrete economic readings than to speculative headlines — a trend that may define the coming weeks.