A mixed performance was witnessed for the British pound on Thursday, as it managed to strengthen against the U.S. dollar while simultaneously falling to its lowest level in six weeks against the euro. This shift in exchange rates occurred against the backdrop of weaker-than-expected economic data from both the United Kingdom and the United States, which contributed to increased volatility in currency markets.
The euro’s advance was particularly notable, as it climbed to its highest point in nearly four years against the U.S. dollar. This movement was driven by a wave of investor caution, prompting a flight to traditionally safer assets amid lingering uncertainties surrounding the U.S.-China trade environment. Market participants were observed to be reacting to broader geopolitical developments while also absorbing the implications of recent economic data releases.
In the UK, fresh figures related to the manufacturing sector were released, indicating a downturn that, while slightly milder than initial estimates, still reflected an ongoing contraction in output, new orders, and employment. Companies operating within the manufacturing space were reported to have pointed to the combined pressures of recent tax increases and the continued effects of U.S. tariffs under the trade policy of President Donald Trump. These factors were said to have sustained the drag on productivity and dampened business sentiment heading into the summer months.
Senior foreign exchange strategists interpreted the data as confirmation that the UK economy remains mired in structural and cyclical challenges. Nick Andrews of HSBC was among those who noted that Thursday’s report followed other discouraging indicators released earlier in the week. Labour market data published on Tuesday revealed that wage growth had slowed to its lowest pace since September 2024, further signaling softness in domestic economic momentum. On Wednesday, the government’s public spending review was introduced, though its contents were seen by many analysts as lacking sufficient stimulus, instead drawing renewed attention to the possibility of future tax hikes in the autumn.
These developments were met with a subdued response in the financial markets. Yields on British government bonds fell, and the pound had also experienced declines earlier in the week as a result of the disappointing labour figures. Currency traders appeared to revise their expectations for the trajectory of Bank of England (BoE) interest rates, with bets increasing that the central bank would be forced to adopt a more accommodative stance in the months ahead.
As of Thursday, the pound had depreciated by 0.6% against the euro, reaching 85.28 pence. Earlier in the session, it had touched 85.37 pence, marking its weakest level since May 2. Currency analysts noted that recent movements in yield differentials between the UK and the eurozone suggested that a further weakening of sterling was likely, with the 85 pence mark serving as a key technical threshold.
Attention in the financial community now turned toward the upcoming BoE policy meeting scheduled for next week. While the central bank was broadly expected to maintain interest rates at current levels during the meeting, traders in money markets appeared to have priced in additional easing by the end of the year. Current market expectations were said to include a full 25 basis point rate cut by September, followed by another 25 basis points before the close of 2025.
Some economists believe that a shift in the BoE’s tone may be imminent. Matthew Ryan, head of market strategy at Ebury, suggested that the Monetary Policy Committee (MPC) might soon abandon its previously hawkish rhetoric. According to his view, a more dovish posture could lay the groundwork for a rate reduction as early as August, particularly if economic data continues to underperform forecasts.
Meanwhile, the unveiling of British Finance Minister Rachel Reeves’s fiscal strategy on Wednesday failed to provoke a strong reaction from financial markets. Her plans had already been largely anticipated by economists, many of whom had forecast the introduction of additional taxation measures later in the year. The market’s muted response was interpreted as a sign that investors had already factored in the likelihood of tighter fiscal conditions in the second half of the year.
In summary, the performance of sterling this week has been shaped by a convergence of domestic economic weakness, cautious investor sentiment, and recalibrated expectations for monetary and fiscal policy. As the BoE prepares to deliberate on its next moves, and with the euro demonstrating relative strength in current market conditions, the pound is likely to remain sensitive to shifts in both domestic indicators and broader global developments.
