🇬🇧 Sterling Under Pressure as Dollar Rebounds and Political Risks Build
It was an interesting week for sterling, with GBP/USD falling roughly 1% after the dollar staged a recovery following a stronger-than-expected nonfarm payrolls report. Cable opens Monday morning around the 1.33 mark, while limited volatility has kept GBP/EUR anchored near 1.15, with the market failing to make a decisive push towards 1.16 last week. From a domestic perspective, analysts warn that the pound may be under-pricing the political risks associated with the upcoming Makerfield by-election, with tensions expected to rise over the coming week.
The contest is expected to be closely watched, particularly given the prospect of an Andy Burnham victory. Burnham is viewed as a left-leaning candidate whose commitment to the UK’s fiscal rules may be perceived as weaker, potentially weighing on sterling if markets begin to price in greater political and fiscal uncertainty. Burnham confirmed on Thursday that he would stand in the leadership election, adding further focus to the by-election.
Reports also suggest that JP Morgan has taken a long position in EUR/GBP ahead of the vote, while betting markets currently place Burnham’s odds of winning Makerfield above 75%. As a result, markets are likely to pay close attention to the political build-up this week, with any signs of increased uncertainty potentially adding pressure to the pound.
🇺🇸 Dollar Rally Extends as Strong Jobs Data Supports USD
USD strengthened last week, with the DXY rising close to 1% and extending its monthly gain to nearly 2%. The move was partly driven by geopolitical uncertainty, as headlines around a potential US-Iran peace deal continued to shift between optimism and caution. However, the main catalyst was stronger U.S. labour market data. The economy added 172,000 jobs in May, well above expectations of 82,000, while the previous two months were revised up by a combined 93,000.
This lifted the three-month average pace of job creation to 188,000, reinforcing the resilience of the US economy. These figures continue to challenge expectations of a material slowdown in 2026. That said, a US-Iran peace deal and the reopening of the Strait of Hormuz could weigh on the dollar by lowering oil and gas prices, easing inflationary pressure and limiting further USD upside. In the meantime, however, the current upward trend has the potential to continue.
🇪🇺 Euro Faces Dollar Headwinds as Sterling Pair Stays Rangebound
The euro came under pressure against USD last week and continues to look on the back foot, with EUR/USD opening the week barely above the 1.15 mark. Friday’s stronger US labour market report reinforced USD strength, while geopolitical uncertainty and resilient US economic data are likely to remain key headwinds for the euro in the near term. Against sterling, however, the picture remains more subdued. GBP/EUR has struggled to make a sustained break above 1.16 this year, reflecting a lack of meaningful volatility in the pair.
Interestingly, EUR/GBP volatility is now at its lowest level since 2007, which may suggest markets are becoming complacent. Periods of extremely low volatility can leave markets vulnerable to sharp moves if an unexpected catalyst emerges. Similar periods of calm were seen ahead of larger market shocks in 2007, early 2017 and late 2019. As a result, the euro currently appears quiet rather than weak against sterling. While markets are not pricing in a major EUR/GBP move, the low-volatility environment looks fragile. If central bank uncertainty, equity-market risk or broader market stress increases, the euro could potentially benefit against the pound.
🇳🇿 Currency In Focus – New Zealand Dollar
This week’s currency in focus is the New Zealand dollar, which has weakened over the past fortnight as global risk sentiment has deteriorated. A key point to remember is that the New Zealand dollar is a risk-sensitive currency. When equity markets are strong and investors are confident, NZD typically benefits. However, recent geopolitical tensions and higher oil prices have weighed on risk appetite, contributing to a decline of nearly 2.4% against the USD over the past month.
From a GBP/NZD perspective, the pair remains broadly supported and has now broken above the key 2.30 level. This move reflects continued pressure on NZD, which remains vulnerable to weaker risk sentiment and geopolitical uncertainty. sterling has benefited from this environment, enabling GBP/NZD to build on its recent recovery and regain upward momentum. A sustained move above 2.30 would reinforce the constructive outlook, with this former resistance area now becoming a key support level to watch in the weeks ahead.
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