Pound under pressure after UK welfare U-turn
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Daily Currency Update
The British pound experienced a sharp decline yesterday after Prime Minister Keir Starmer and Chancellor Rachel Reeves unexpectedly reversed their decision to implement £5 billion in welfare cuts. This abrupt policy shift, combined with Reeves’ emotional address in Parliament and Starmer’s initial reluctance to confirm her position, unsettled financial markets. The uncertainty surrounding the government’s fiscal direction led to a spike in gilt yields and a drop of 1% on GBPUSD, marking the currency’s most significant intraday move in weeks.Although Starmer later reassured the public by stating Reeves would remain Chancellor “for a very long time,” investor confidence remains fragile. Concerns are mounting over Labour’s fiscal credibility, especially as public spending pressures grow and economic momentum slows. The market reaction reflects broader anxieties about the government’s ability to maintain fiscal discipline.
With no major UK economic data scheduled for release today, sterling is expected to be influenced more by global risk sentiment, external market developments, and ongoing domestic political uncertainty. If further headlines cast doubt on Labour’s economic strategy or leadership stability, the pound may continue to face downward pressure in the near term.
Key Movers
The US dollar weakened on Wednesday, reversing early gains amid signs of labour market softness and rising political tensions. ADP data showed a surprise 33,000 drop in private payrolls for June, the first decline in over two years, fuelling expectations of a September Fed rate cut. Meanwhile, political uncertainty grew as Trump’s tax-and-spending bill faced resistance in the House, triggering a backlash from the former president. These twin pressures pushed Treasury yields lower and weighed on the dollar. Looking ahead, markets are focused on key data releases today with Non Farm Payrolls, ISM Services, and US PMIs, which could drive sharp USD moves and impact GBPUSD direction into the end of the week.The euro extended its rally, reaching its highest level in nearly four years as investors shifted toward European assets amid growing US market volatility. EURUSD surged past $1.18, marking a 14% year-to-date gain, despite interest rate differentials favouring the dollar. At the ECB Forum in Sintra, President Christine Lagarde described this as a “global euro” moment, positioning the currency as a safe-haven alternative. However, ECB Vice-President Luis de Guindos cautioned against excessive appreciation, warning that a move beyond $1.20 could hurt inflation and exports.
The euro’s strength, while beneficial for import prices, risks undermining external demand and complicating Europe’s fragile recovery, especially amid rising trade tensions with the US. With the Eurozone currently seen as more fiscally and politically stable than the UK, EURGBP may continue to trend higher if uncertainty around UK leadership and policy persists.
Expected Ranges
- GBP/USD: 1.3580 - 1.3700 ▼
- GBP/EUR: 1.1510 - 1.1615 ▼
- GBP/AUD: 2.0580 - 2.0810 ▼
- EUR/USD: 1.1715 - 1.1845 ▲