Sterling finds its feet as markets reassess the UK outlook

Sterling has emerged as one of the stronger-performing major currencies this week, gaining ground against the US dollar, Japanese yen and euro as investors reassess the relative outlook for monetary policy. While much of the move has been driven by a softer US dollar following weaker-than-expected US inflation, the pound has also benefited from expectations that the Bank of England may have less scope to ease policy than some of its global peers. Sticky domestic inflation and resilient wage growth continue to suggest UK interest rates could remain elevated for longer, providing support for the currency.

Against the dollar, GBP/USD has staged an impressive recovery from its late-June lows, briefly pushing above 1.35 before encountering resistance. The pair has been helped by a moderation in expectations for further Federal Reserve tightening after softer US CPI, although gains have been tempered by Fed Chair Kevin Warsh's insistence that policymakers remain focused on returning inflation sustainably to target.

GBP/USD daily chart

Past performance is not a reliable indicator of future results.

Technically, GBP/USD has broken back above its 20, 50, 100 and 200-day moving averages, reinforcing the improvement in momentum. However, the rejection from the 1.3550 area suggests buyers may need a fresh catalyst before extending the rally further.

Sterling has also continued to outperform the yen. GBP/JPY has climbed to fresh multi-decade highs as the structural divergence between UK and Japanese interest rates remains firmly in place. While the Bank of Japan has gradually tightened policy, yields remain significantly below those available in the UK, continuing to encourage capital outflows from Japan. The pair remains in a well-established uptrend, although increasingly elevated levels may keep traders alert to the risk of further verbal or direct intervention by Japanese authorities should yen weakness accelerate.

GBP/JPY daily chart

Past performance is not a reliable indicator of future results.

The move against the euro has been equally notable. EUR/GBP has broken decisively lower, reflecting growing expectations that the Bank of England will maintain a relatively restrictive stance as the European Central Bank is expected to be approaching the end of its tightening cycle. From a technical perspective, the pair has fallen to its lowest levels in several months, confirming the recent deterioration in euro momentum relative to sterling.

EUR/GBP daily chart

Past performance is not a reliable indicator of future results.

Looking ahead, the pound's outlook is likely to remain closely tied to relative interest-rate expectations. If UK inflation proves more persistent than elsewhere, sterling could continue to benefit from a higher-for-longer policy outlook. However, much will also depend on the Federal Reserve. Should US inflation stabilise and Kevin Warsh convince markets that rates are likely to remain restrictive for longer, renewed dollar strength could limit further upside in GBP/USD. For now, sterling appears to have regained momentum, but the next leg of the move will likely require continued support from both domestic data and the broader global macro backdrop.