The Sterling has recovered against the dollar, but political uncertainty and shifting rate expectations are keeping currency markets sensitive.
The British pound rose towards a four-week high on Thursday, helped by a softer US dollar and calmer conditions in UK markets. Sterling traded around $1.34, extending its recovery from the seven-month low reached in late June. The move came as the dollar slipped for a second day, giving major currencies including the euro, yen and pound some breathing space after a volatile few weeks.
The rebound does not mean the UK currency is free from risk. A level of political uncertainty remains, whilst markets are still weighing how far the Bank of England may need to go if inflation pressure proves harder to contain.
Sterling recovers from June lows
The pound’s latest rise follows a difficult period for UK assets. Sterling came under pressure in late June after the UK’s political backdrop shifted sharply. At the time, FX Trust Score noted that the pound stayed calm after Starmer’s resignation, but that fiscal credibility remained the larger issue for investors.
That remains true now. The pound has recovered, however the next phase will depend on whether markets believe the UK can maintain a stable economic policy path while inflation, energy costs and borrowing pressures remain active concerns.
The recovery also reflects a wider pullback in the dollar rather than a purely UK-driven move. When the US currency softens, sterling often benefits, particularly if there is no fresh domestic shock pulling the pound lower.
Dollar weakness gives the pound room to rise
The dollar slipped for a second consecutive session as investors balanced several competing forces. US labour-market data remained steady, which keeps inflation and interest-rate expectations alive. At the same time, renewed tensions in the Middle East have added uncertainty to the global outlook, especially through oil prices and inflation expectations.
This has made the dollar harder to read. In some risk-off periods, the US currency can strengthen as investors seek safety. However, when markets focus more on domestic US rate expectations or take profits after a strong dollar run, other major currencies can recover.
That is what has helped sterling this week. The pound has not surged dramatically, but it has regained ground as the dollar lost some momentum.
UK rate expectations remain a key driver
Bank of England expectations are still central to sterling. Markets are now pricing in fewer UK rate rises than they had earlier expected. That can limit the pound’s upside because higher interest-rate expectations usually make a currency more attractive. But the picture is not simple.
If inflation remains sticky, the Bank of England may still have to keep policy tighter for longer. That could support sterling in some circumstances, but it would also raise concerns about growth, household pressure and the wider UK economy. For now, markets appear to be treating the pound as a currency with support, but not a clear one-way path higher.
Sterling gains against the euro and yen
The pound’s strength is not only visible against the dollar. Sterling has also held firm against the euro, which has been trading near its weakest levels against the pound in around a year. Against the yen, sterling remains close to levels not seen in more than 18 years.
The yen remains under particular pressure as Japan’s interest rates are still lower than those in many other major economies. This has kept yen crosses sensitive to global rate differences and broader risk appetite.
Currency volatility is picking up
The pound’s recovery comes at a time when currency markets are becoming more reactive. Moves across sterling, the dollar, yen and euro have become more sensitive to political headlines, inflation signals, oil prices and central-bank expectations. That fits the wider pattern FX Trust Score has already highlighted, with investors preparing for larger moves across forex markets as macro conditions become less predictable.
For anyone following GBP/USD, the important point is that the pound’s rebound has not removed volatility. It has simply shifted attention to the next set of risks: UK political direction, Bank of England expectations, US dollar sentiment and the path of oil-driven inflation.
What to watch next
The next test for sterling will be whether it can hold above the $1.34 area if the dollar stabilises. Markets will also be watching UK political appointments, fiscal signals, inflation data and any change in Bank of England commentary. In the US, labour-market data and Federal Reserve signals will continue to influence the dollar side of the pair.
For now, the pound has regained some ground after its June weakness. However, the move looks more like a cautious recovery than a clean breakout. Sterling is stronger, but the conditions behind the move remain fragile.
