The British pound continued its robust ascent against the US dollar on Tuesday, July 7th, touching a three-week high of 1.3401 in Asian trading before retreating slightly to around 1.338.
This marks the currency pair's ninth consecutive day of gains, representing a cumulative increase of nearly 2% from a starting point near 1.3150.
Concurrently, sterling held firm near a 13-month peak against the euro, with the euro trading at 85.41 pence.
Key Drivers Behind the Sterling Surge
The pound's sharp rally is the result of several converging factors: a much weaker-than-expected US jobs report for June significantly dampened market expectations for Federal Reserve interest rate hikes, a proposed US-Iran peace framework agreement triggered a steep drop in oil prices easing inflationary pressures, and a commitment to fiscal discipline from the UK's Prime Minister-elect, Andy Burnham, has alleviated market concerns over potential fiscal expansion.
US Jobs Data and Oil Price Plunge Form a Deflationary One-Two Punch
The core driver of the pound's nine-day winning streak is a market reassessment of the Federal Reserve's policy trajectory.
In late June, the US dollar had reached a 13-month high against major currencies as traders increased bets on Fed rate hikes this year.
However, a combination of data and events is now undermining those expectations.
The first crack appeared in the labor market.
Data released by the US Labor Department on July 2nd showed that non-farm payrolls increased by only 57,000 in June, far below the market forecast of 110,000, with previous months' figures also revised downward.
While this moderation in job growth is far from alarming, it was sufficient to cast doubt on inflation pressures driven by an overheated labor market.
The second variable is the price of oil.
Progress on a US-Iran framework agreement and a decision by OPEC+ to increase production have driven a notable recent decline in crude prices.
On Tuesday, Brent crude futures traded near $72 per barrel, with WTI crude below $69.
This marks a significant retreat from levels above $100 per barrel for Brent seen earlier amid the Iran conflict.
The decline in energy costs not only directly reduces headline inflation figures but also alleviates the "inflation spiral" pressures that had most concerned the Federal Reserve by lowering transportation and raw material costs.
The combined effect has led to a significant adjustment in market expectations for Fed rate hikes.
Where markets had previously priced in consecutive hikes for July and September, those bets have now been substantially scaled back.
The resulting pressure on the US dollar index has provided a supportive macro backdrop for the pound's sustained advance.
However, the dollar's weakness is not a wholesale rout.
Comments from Federal Reserve Governor Waller on Monday provided a floor for the dollar, as he emphasized the "double-edged sword" effect of forward guidance, essentially paving the way for more flexible policy communication.
Additionally, the June ISM Services PMI came in at 54.0, remaining in expansion territory, with its employment index rebounding significantly to 51.2 from a contractionary 47.9.
This suggests limited downside for the dollar, with any significant upward catalyst awaiting further confirmation from economic data.
Eurozone Factors: Cooling Inflation Dampens ECB Hike Expectations
The pound's rise to a 13-month high against the euro also benefits from inherent weakness in the eurozone.
Eurozone inflation fell sharply to 2.8% in June from 3.2% in May, coming in below economists' expectations of 3.0%.
This unexpected cooling has led markets to scale back bets on further interest rate increases from the European Central Bank.
Simultaneously, eurozone government bond yields have been declining faster than their UK counterparts, with the widening yield differential further propelling the pound higher against the euro.
The pound touched 1.1705 against the euro on Tuesday, its highest level in 13 months.
Analysts at ING noted that speculators are currently heavily short on the pound, near levels seen shortly after the 2016 Brexit referendum, implying that a potential short squeeze could exert further upward pressure on sterling.
Oil Price Slump: Energy-Importer UK Among Major Beneficiaries
Analysts point out that the pound has gained significant support from the plunge in oil prices.
The UK is a major energy importer with relatively low gas storage, making it highly sensitive to energy price volatility.
Earlier this year, the surge in oil prices triggered by the Iran conflict posed a severe threat to the UK economy.
With progress on a US-Iran framework agreement and the gradual resumption of traffic through the Strait of Hormuz, oil prices have largely returned to pre-conflict levels.
Concurrently, UK inflation rates have moderated.
The sharp drop in energy costs has not only alleviated inflationary pressures in the UK but also provided the Bank of England with greater policy flexibility.
However, a Bank of England survey in June showed UK firms expect to raise their output prices by 4.1% over the next year, up from 4.0% in May and the highest since early 2024, indicating that the impact of the energy price shock on corporate pricing plans has not fully dissipated.
Political Risk Eases: Burnham Pledges Fiscal Discipline
Another notable aspect of the pound's recent performance is its resilience amidst UK political turbulence.
Previous remarks from Prime Minister-elect Andy Burnham about the UK needing to "break free from bond market dependency" initially caused market unease.
However, Burnham subsequently clarified his commitment to the government's existing fiscal rules, which require day-to-day spending to be covered by taxation and aim to reduce the debt-to-national income ratio by the 2029/30 fiscal year.
This pledge has effectively eased investor concerns that the left-leaning former mayor of Greater Manchester would embark on a major fiscal spending spree upon taking office.
The UK's £2.9 trillion government bond market has so far shown no significant signs of distress, benefiting both from the post-conflict decline in oil prices and from the image of fiscal responsibility Burnham is working to project.
Nevertheless, the practical fiscal challenges he faces are substantial.
The UK is projected to spend approximately £109 billion on debt interest in the 2026/27 fiscal year, exceeding the roughly £68 billion defense budget.
The incoming Prime Minister also needs to find an additional £4.7 billion for a defense investment plan.
Bank of America estimates that the fiscal headroom has shrunk to £19 billion from £24 billion before the conflict.
ING has warned that sterling could surrender recent gains if concerns over UK fiscal sustainability resurface.
Outlook: The 1.3400 Level as a Critical Test
From a technical perspective, the pound's nine-day advance against the dollar has established a clear short-term bullish trend.
The exchange rate is now approaching the key psychological barrier of 1.3400.
A decisive break above this level could see the next targets at 1.3450 and potentially the 1.3500 area, with initial support seen around 1.3300.
Commenting on the situation, a senior investment specialist noted that the pound's surprising resilience during recent political turmoil reflects a simple reality—much bad news was already priced in.
Investors had spent years preparing for worse UK economic performance, but as outcomes prove less dire than feared and fundamentals begin to stabilize, sterling is finding support.
However, headwinds for the pound's rally persist.
Market expectations for Bank of England rate hikes this year have plummeted from two to just one, with a probability of only about 70%.
A month ago, money markets priced in at least 44 basis points of tightening; that has now fallen to around 17 basis points, with ING forecasting the BoE will hold rates steady for the remainder of the year.
With multiple factors at play—including the sustainability of the US-Iran ceasefire, uncertainty over the Fed's policy path, and the practical direction of the new UK government's fiscal policy—whether the pound can convincingly break the 1.3400 barrier and open the door for further gains remains a key focus for the market.
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