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Sterling's recovery against the Dollar looks liable to stall this week as safe-haven demand builds.
The Pound to Dollar exchange rate has handed back the entirety of its August advance over the past month, and last week's attempt at a recovery ran out of road well short of where the decline began, which leaves the floor of the year's range the more likely destination in the days ahead.
Sterling has found buyers down here, helped by Friday's U.S. employment report, which came in soft enough to take an October Federal Reserve rate rise out of market pricing and to put a base under the pair into the weekend.
Yet, the USD has held up well, indicating an underlying resilience.
"We expect dollar gains to sustain," say strategists at Barclays in the bank's FX Weekly, with the Federal Reserve's hikes amounting to "a demonstration of policy independence" and the U.S. economy continuing to outperform. The discount the Dollar had carried on doubts about that independence is unwinding, and there has been "some additional dollar premium decompression" already, with the market "still some way away from full unwind."
The market trades at 1.3235 at the start of the new week, leaving it beneath a band of graphical horizontal resistance running from 1.3274 to 1.3302 that turned the rebound away at the end of last week.
The relative strength index has turned up from the low thirties and reads 35, which is consistent with a market that has stopped falling without yet establishing that it can rally.
Above: GBP/USD daily chart. Image © Pound Sterling Live, chart created with TradingView.
The 21-day moving average has been falling since the middle of September and sits at 1.3363, putting the market just under one percent beneath its short-term trend indicator.
What does a gap of that size tell us? Exchange rates tend to mean-revert to the 21-day when they have run some distance from it, so a deviation approaching one percent argues for a shallow rebound or for a spell of consolidation. The second route matters as much as the first, because the average is falling towards the market, and a pair that simply goes sideways will see the gap close without any recovery at all.
This is by no means a bullish call for Pound-Dollar in the days ahead.
1.3140 is the level that matters below, the graphical horizontal support marking the floor of the range the pair has traded all year, and the mid-August break above 1.3506 has now been fully reversed, which puts Sterling back inside the band it spent the first half of 2026 in.
For now, our Pound to Dollar forecast looks for the rebound to stall beneath 1.3302 and for 1.3140 to come back into view, with a daily close above the 21-day enough to change our mind.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistBond Yields Keep the Dollar Bid After Soft Payrolls
September's U.S. employment report delivered 29,000 jobs against a market looking for around 90,000, with August revised down to 133,000, unemployment up to 4.2% and average hourly earnings rising 0.1% on the month.
A U.S. release that beats expectations says the economy can carry higher interest rates, which lifts bond yields and the Dollar with them and pushes Pound-Dollar lower; a miss does the reverse.
Markets took an October rate rise out of the price while leaving the December meeting live, and the ten-year Treasury yield dropped on the release before recovering to finish Friday near 5.26%, with the Dollar index closing the week 0.91% higher.
The ISM services index for September is the week's calendar highlight for Pound-Dollar and lands on Monday at 15:00, with the market looking for 55 after 55.4 and the prices paid component seen at 73 after 72.6.
The Federal Reserve publishes the minutes of its September meeting on Wednesday at 19:00, where the question is whether the committee treated last month's increase as a mid-cycle adjustment or as the opening of a sequence, according to BofA Global Research in its Global Macro Watch of 4 October.
Four policymakers speak on Monday and Williams moderates a panel on Tuesday afternoon, and any hint that December is firmer than the market has it would put the Dollar back on the front foot.
French Spreads Send Safe-Haven Flows the Pound's Way
Concerns about the sustainability of France's public debt have started to weigh on the Euro, which had come through months of bond market turmoil more or less unaffected, and the money leaving the single currency has to go somewhere.
"As long as investors have access to a euro-denominated safe asset, the current problems of the French government remain a problem for OATs rather than for the euro itself," says Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank, in the bank's Daily Currency Briefing of 5 October.
German Bunds have stayed unaffected in the latest bout, which limits how far the Euro can fall for now, and early signs of contagion spilling over to Germany would constitute a clear warning signal for the single currency, says Commerzbank.
The Pound was, meanwhile, among the key beneficiaries of the widening in French spreads last week, because "markets are yet to focus on the upcoming UK Budget, which in any event poses far smaller challenges than the French one," says Barclays.
"The spread of UK government bond yields over the rest is declining, suggesting that new Prime Minister Andy Burnham has so far succeeded in convincing investors he will continue the fiscal consolidation that his predecessor began," says Holger Schmieding, Chief Economist at Berenberg, in a note co-authored with Felix Schmidt and Andrew Wishart.
Burnham's conference speech set out sizeable spending ambitions but placed their delivery on a ten-year timeline, which kept near-term borrowing plans intact.
"So long as the new administration does not surprise the market with higher borrowing in the 28 October budget, UK government bond yields should fall back into the international pack next year," says Schmieding.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
