Sterling heads for weekly loss as fiscal concerns loom

Sterling was poised for a weekly loss on Friday, marking a lacklustre end to a week that saw fiscal and political uncertainties rattle investor appetite for UK assets.

The pound was flat and last fetched $1.36, while against the euro it inched 0.1% lower and was last at 86.26 pence. Gilt yields were broadly steady in late morning trading.

However, on a weekly basis, cable was down 0.4% against the greenback, while it had fallen about 1% against the euro, marking its biggest one-week drop against the currency since U.S. tariffs on world economies took effect in early April.

UK stocks, bonds and cable witnessed a selloff earlier in the week, after the government’s welfare reforms were not well received by ruling Labour Party members and stirred speculation about the future of finance minister Rachel Reeves.

Some analysts even drew parallels between this week’s market reaction and the rout during former Prime Minister Liz Truss’ premiership in 2022.

With the Keir Starmer-led government completing one year in power, uncertainties prevail over the options it has to balance public accounts.

Sterling steadies after selloff, fiscal worries prevail

“There is speculation that given the difficulties the government has faced in finding savings from welfare budgets, tax rises are likely in the Autumn Budget,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“Bets are rising that the Bank of England will cut interest rates more quickly with a reduction in August increasingly on the cards. So, that’s kept a bit more downwards pressure on sterling.”

Traders expect the Bank of England to lower borrowing costs by 25 basis points next in September and are anticipating another interest rate cut by the same amount before the year ends, data compiled by LSEG showed.

Further, top ratings agency S&P said the inability of Britain’s government to make modest cuts to welfare spending this week underscores that it has very limited budgetary room to manoeuvre.

Despite the week’s developments, the pound is at a near four-year high against the dollar and is up about 9% so far this year, having benefited from broader dollar weakness and as a U.S.-UK trade deal offered some relief on the tariff front.