The sterling or the British pound was at one time referred to as one of the strongest and most stable currencies in the world. However, recent happenings have made investors and economists question whether sterling is starting to lose its lustre.
On Thursday, sterling showed a slight gain against the US dollar, but it fell to a six-week low against the euro. These events are not just foreign exchange market movements, but there are deep economic and political roots hidden behind them which are very important to understand.
UK economic slowdown:
The UK economy has been facing many challenges for some time now. Although the fall in manufacturing sector was comparatively lower in May, a gradual fall in production, new orders and jobs has been observed.
Recent tax increases and US President Donald Trump tariffs are the leading causes of this downturn. Companies have clearly stated that due to these economic pressures they are being forced to cut operations.
According to Nick Andrews, senior forex strategist at HSBC, “Thursday’s data shows that the UK economy is still facing many serious challenges.”
Weakness in the labor market and government spending review
The labor market data released on Tuesday further disappointed. It was expected that employment and salary growth would see strength, but on the contrary, the salary growth rate fell to the lowest level since September 2024. This made it clear that the purchasing power of ordinary citizens is decreasing.
The spending review presented by the government on Wednesday also did not raise much expectations. Instead, attention was focused on which areas could get tax hikes in the coming autumn.
All these reasons together increased uncertainty in the market and weakened sterling.
Sterling vs Euro: Fall Statistics and Analysis
On Thursday, sterling fell 0.6% against the euro to 85.28 pence, its lowest level since May 2. Analysts say yield spreads between the UK and the euro zone were already indicating that sterling could fall to 85 pence.
That is, this fall was not sudden, but its signs were already being received. The fall in UK government bond yields and weak economic signals together led to this situation.
Role of Bank of England and possible rate cut
The next meeting of the Bank of England (BoE) is scheduled next week. It is currently being speculated that the bank will not make any changes in rates. But money market traders believe that interest rates can be cut twice by the end of this year.
The possibility of a 25 basis point cut by September and a total of 50 basis points by the end of the year has been fully evaluated.
“We think the Bank of England may retreat from its tight monetary policy stance, opening the way for a potential interest rate cut in August,” says Matthew Ryan, Ebury’s head of market strategy.
This is a big sign that UK monetary policy may become more flexible in the coming months, but in turn, this will put further pressure on sterling.
Rachel Reeves’ plans and market reaction
Britain’s Finance Minister Rachel Reeves recently announced economic plans, but the market reaction was extremely weak. Most economists already expected that more taxes could be imposed by the end of this year, so her plans did not provide any major relief.
Unless the government brings a solid and growth-oriented policy, it will be difficult to restore investor confidence.
Global perspective: Dollar and China’s impact
The euro hit its highest level in nearly four years against the dollar this week. This was due to global investors fleeing to “safe haven” assets.
At the same time, the dollar remained under pressure due to the uncertainty of the trade agreement between the US and China. Due to this, the euro strengthened and the weakness of the pound was exposed even more.
Some relief against the dollar, but for how long?
Even though the sterling rose against the US dollar on Thursday by 0.4 percent to end at 1.3597, analysts are of the view that this is a short term reprieve.
The prolonged perspectives continue being feeble because of the feeble financial circumstances in the UK as well as the potential liberalization of financial policy.
Conclusion:
The current situation of the British pound is affected by many internal and external reasons. Issues such as economic slowdown within the country, weak labor market, uncertainty of tax policies, and possible rate cuts by the Bank of England are weighing on sterling. On the other hand, factors such as global economic conditions, dollar weakness and euro strength are also affecting it. If the government and central bank do not take quick and clear policy decisions, the sterling situation may deteriorate further in the coming months. Both investors and the general public will have to remain vigilant and pay attention to economic indicators.
FAQs
1. Why has the British pound (Sterling) fallen to a six-week low against the euro?
A. The decline is primarily driven by weak UK economic data, including falling wage growth, slowing manufacturing output, and uncertainty over government spending plans.
2. What economic data affected Sterling’s value?
A. Recent labor market reports showed slower-than-expected wage growth, and manufacturing data indicated continued declines in output, orders, and jobs.
3. How did the euro gain strength during this period?
A. The euro strengthened as investors moved toward safe-haven assets amidst global market uncertainty, especially surrounding U.S.–China trade tensions.
4. What role did the Bank of England play in the currency drop?
A. Expectations of upcoming interest rate cuts by the Bank of England weakened investor confidence in Sterling, contributing to the currency’s decline.
5. Is the UK government planning tax hikes, and how does that affect the pound?
A. Yes, there are expectations of further tax increases later this year, which have created additional uncertainty, putting downward pressure on the pound.
