The Pound Sterling (GBP) finds itself in a precarious balancing act this week, attempting to recover from a steep 0.8% decline on Wednesday caused by political instability and rising UK bond yields. As of Thursday’s European trading session, the GBPUSD pair has stabilized around 1.3650, following reassurances by Prime Minister Keir Starmer that Chancellor Rachel Reeves would remain in her post despite mounting fiscal concerns.
Reeves’ position came under scrutiny after Downing Street announced an unexpected increase in welfare spending particularly the standard allowance for Universal Credit casting doubt over the government’s fiscal commitment. The move directly contradicts Reeves’ earlier pledge to tighten the budget during the Autumn Statement to stabilize national debt, which spooked markets and triggered a sell-off in UK gilts and the Pound.
Political Turmoil: Markets Rattle on Reeves Uncertainty
The turmoil began when Prime Minister Keir Starmer initially failed to confirm whether Rachel Reeves would continue as Chancellor until the next general elections. Markets, already sensitive to fiscal slippage, interpreted this hesitation as a sign of internal discord. Given Reeves’ perceived role as a guarantor of fiscal responsibility, the ambiguity intensified investor concerns.
Later, Starmer attempted to quell market fears, stating, “She is going nowhere,” in reference to Reeves. This comment was seen as damage control, prompting a partial recovery in Pound from intraday lows.
However, the credibility of the UK government’s fiscal framework remains under pressure, particularly as the new welfare reforms appear to erase approximately £5.5 billion in planned budget savings by 2029–2030, according to projections from the UK’s Institute for Fiscal Studies (IFS).
UK Bond Market Reacts: Gilt Yields Spike on Fiscal Risk
In response to the evolving political narrative, UK 10-year gilt yields surged by 17 basis points to 4.61% on Wednesday, reflecting investor concerns over fiscal laxity. This represents a near-4% daily jump and underscores the sensitivity of UK debt markets to political signaling.
Higher bond yields suggest rising borrowing costs for the UK government—an unfavorable development when economic growth is already fragile and trade tensions are rising globally. The additional fiscal burden may restrict future public investment and undermine consumer confidence.
Welfare Expansion: Fiscal Credibility Under Fire
At the center of the controversy lies a new welfare package aimed at providing additional support to low-income households. The government raised the Universal Credit standard allowance effective July 1st, a move widely seen as necessary for social equity but also fiscally risky.
The reform directly contradicts previous commitments to reduce benefit spending, with cuts to Universal Credit’s health component for new claimants now shelved. The UK IFS warns this could jeopardize medium-term fiscal projections, placing added pressure on the Pound.
BoE Policy Outlook: Calls for More Aggressive Easing
Monetary policy developments added another layer to the mix this week. Bank of England (BoE) policymaker Alan Taylor, speaking at the European Central Bank summit in Sintra, voiced support for five interest rate cuts in 2025—more than the four cuts currently priced in by financial markets.
Taylor cited weakening domestic demand and external trade disruptions as reasons for his dovish outlook. His comments further weakened the Pound’s relative appeal, especially when compared to the Fed’s still-cautious stance on rate normalization.
Taylor was among the minority who voted for a cut during the June BoE meeting, signaling growing internal divergence within the central bank.
Eyes on NFP: US Job Data Could Shift Fed Outlook
Across the Atlantic, attention turns to the upcoming US Nonfarm Payrolls (NFP) report for June, due at 12:30 GMT. This data will be a critical input for the Federal Reserve’s monetary policy outlook.
According to consensus estimates, the US added 110,000 new jobs in June, down from 139,000 in May. The Unemployment Rate is expected to edge up to 4.3%, while wage growth is projected to rise 3.9% year-on-year and 0.3% month-on-month.
Soft data could revive market bets for early Fed rate cuts, providing some upside for GBPUSD. However, strong readings would strengthen the Dollar and renew downward pressure on the Pound.
Notably, Fed Vice Chair for Supervision Michelle Bowman has recently warned about increasing downside risks in the labor market, adding: “We should put more weight on those risks going forward.”
Pound Technical Outlook: Mixed Signals Persist
From a technical standpoint, Pound remains confined to a narrow trading band between 1.3620 and 1.3675. A sustained break above the latter could open the door to 1.3720 and 1.3775, while a slide below 1.3620 may trigger deeper losses toward 1.3550.
RSI (Relative Strength Index) on the daily chart remains neutral near 50, suggesting neither bulls nor bears currently hold the upper hand. A clear catalyst possibly the NFP report may be required to determine near-term directional bias.
Broader FX Market Implications
The Pound’s volatility has spillover effects on other European currencies. EURGBP briefly rose toward 0.8600 before easing back. Meanwhile, risk-off sentiment stemming from UK fiscal worries supported safe-haven flows into the US Dollar and Japanese Yen earlier in the week.
Commodity currencies like the Australian Dollar and Canadian Dollar remain largely range-bound, awaiting clearer cues from global economic data and central bank commentary.
Market Expectations
Event Market Expectation Prior Reading
US Nonfarm Payrolls (June) +110K Jobs +139K Jobs
The US Unemployment Rate 4.3% 4.2%
US Avg. Hourly Earnings YoY 3.9% 3.9%
US Avg. Hourly Earnings MoM 0.3% 0.4%
Conclusion: Pound Sterling Struggles Amid Political and Fiscal Headwinds
The Pound Sterling’s recent sell-off underscores how political instability and fiscal policy shifts can swiftly disrupt currency markets. While Pound has managed to regain some footing, lingering doubts over the UK’s fiscal roadmap and Chancellor Reeves’ future continue to loom large. With the upcoming US jobs report likely to be a major directional driver, traders should brace for further volatility in GBP/USD as macro narratives collide with political headlines.
[sc_fs_multi_faq headline-0=”h2″ question-0=”Why did GBP/USD fall sharply this week?” answer-0=”GBP/USD declined due to political uncertainty surrounding Chancellor Rachel Reeves and fears over the UK’s fiscal credibility after unexpected welfare spending announcements.” image-0=”” headline-1=”h2″ question-1=”What impact did bond yields have on the Pound?” answer-1=”Surging UK gilt yields reflect higher borrowing costs and fiscal risk, which weighed on investor sentiment and pressured the Pound.” image-1=”” headline-2=”h2″ question-2=”Will the Bank of England cut rates soon?” answer-2=”While the BoE is expected to ease policy later this year, policymaker Alan Taylor has advocated for five cuts in 2025, suggesting growing dovish sentiment.” image-2=”” count=”3″ html=”true” css_class=””]
