🇬🇧 GBP Under Pressure as Fiscal Concerns and Geopolitics Weigh
GBP remained on the back foot last week against both the Dollar and the Euro, with another week in the red for both Cable and GBP/EUR. Cable has opened Monday’s session on a weaker footing, dipping below 1.33, while GBP/EUR begins the week hovering just above 1.15. A key driver behind the downside continues to be the conflict in the Middle East, with rising oil and gas prices threatening to push UK inflation higher. This comes at a time when the government, already heavily indebted, is considering further energy support measures, raising concerns over fiscal sustainability.
These pressures are beginning to show in the UK bond market, where gilt yields have been rising as investors demand higher returns amid uncertainty around the economic outlook and policy direction. Crucially, this is being interpreted as a sign of stress rather than strength, weighing on GBP and reflecting reduced confidence in UK assets. Further highlighting the fiscal strain, the ONS reported that government borrowing reached £14.3BN in February, well above the £8.8BN expected. Debt interest payments have also surged, more than doubling year on year from £5.5BN to £13BN. Taken together, these factors are fuelling longer-term concerns ahead of the autumn budget, with markets increasingly wary of potential tax rises and further pressure on the UK economy.
🇺🇸 Dollar Strengthens as Middle East Tensions Escalate
The US Dollar continues to build momentum as geopolitical tensions intensify, with President Trump reportedly taking an increasingly active role in securing global energy supply routes. Focus has centred on the Strait of Hormuz, where reports suggest US forces, including low-flying jets and Apache helicopters, have been deployed to target Iranian vessels and drones near the key shipping lane. Should tensions escalate further, the Dollar is likely to remain supported by safe-haven demand, while both the Euro and Pound could continue to face downside pressure.
🇪🇺 Euro Resilient as ECB Outlook Turns More Hawkish
The Euro strengthened against the Pound last week but has started Monday’s session on the back foot against the Dollar, as markets react to escalating geopolitical tensions over the weekend. Despite this, the ECB remains in a stronger position relative to the Bank of England. While policymakers are monitoring the impact of the Middle East conflict, the Eurozone enters this period with inflation already close to its 2.0% target – unlike the UK, where inflation remains elevated. Market expectations have also shifted notably, with money markets now pricing in the possibility of an ECB rate hike later this year. This marks a reversal from last month, when there was some expectation of potential rate cuts, highlighting a more hawkish shift in outlook as the ECB looks to keep inflation under control.
This Week’s Market Moving Data
The ongoing conflict in the Middle East remains the dominant market driver, continuing to overshadow data-specific developments as traders keep a close watch on geopolitical headlines. That said, the UK will see several key data releases this week, notably Wednesday’s Consumer Price Index (CPI) and Friday’s Retail Sales figures. In the Eurozone, attention will turn to services and manufacturing data, with particular focus on Germany’s releases on Tuesday. Meanwhile, the US calendar is relatively quiet, with geopolitical developments likely to remain the primary influence on market direction.
Tuesday March 24th
Eurozone PMI Data
The Euro may see increased volatility around the HCOB PMI releases, as these indicators provide an early snapshot of economic activity across the Eurozone. Stronger than expected readings could support the Euro by signalling economic resilience, while weaker data may reinforce expectations of slower growth and weigh on the currency.
Wednesday March 25th
GBP may move on Wednesday’s CPI release, a key gauge for Bank of England policy. Stronger inflation could support the Pound, while weaker data may weigh on it.
Friday March 27th
UK Retail Sales Data Release
UK Retail Sales data is a key indicator of consumer spending, measuring the value of goods sold by retailers to consumers. A strong reading is typically seen as supportive for the Pound, signalling resilient demand, while a weak result may weigh on GBP by raising concerns over slowing economic momentum.
