Pound Sterling Forecast: UK Wage Data Weakens GBP as Dollar Strength Builds Ahead of ECB Meeting

Key Highlight

• UK wage growth slowed to 4.3%, below the 4.5% market expectation, easing pressure on the Bank of England to raise interest rates at its 30th July meeting. This has reduced one of sterling's key sources of support.

• The outlook for GBPUSD has shifted in favour of a stronger US dollar, with conviction increasing to 65%. Softer UK wage data combined with ongoing geopolitical tensions continues to favour the dollar in the short term.

• GBPEUR remains finely balanced. While weaker UK wage growth has reduced the immediate interest rate advantage for sterling, the UK still maintains a structural rate premium of more than 1.5 percentage points over the eurozone, preventing a clear directional view.

• Markets are now focused on Thursday's ECB meeting, which could become the next major driver for euro and sterling exchange rates.

Market Recap

Sterling faced additional pressure after the appointment of the new Prime Minister, Burnham, whose comments about using greater flexibility within fiscal rules introduced fresh uncertainty for UK markets. Gilt yields climbed to their highest level since May, while the unexpected appointment of John Healey as Chancellor fuelled expectations of increased government spending.

Geopolitical tensions also remained elevated as the United States carried out a tenth consecutive night of strikes on Iran, with further attacks reported in the Strait of Hormuz. This supported demand for the US dollar as a safe haven, increasing costs for businesses and individuals buying dollars.

Although markets had been pricing more than 40 basis points of additional Bank of England tightening by year end, the weaker than expected wage figures now cast doubt over how much of those expectations will remain.

The Australian dollar strengthened during the session, with GBPAUD falling 0.36%. For businesses purchasing AUD250,000, this increased costs by around £240, while sellers of AUD received approximately £240 less.

Market Overview

The US dollar continues to benefit from both softer UK economic data and ongoing geopolitical uncertainty, making GBPUSD the strongest near-term conviction. If sterling were to revisit its 2026 low, purchasing USD250,000 could cost around £5,335 more, while a recovery towards the May and June highs would reduce costs by approximately £2,045, highlighting that downside risks currently outweigh the potential upside.

For EURUSD, the near-term outlook still leans towards a stronger dollar, supported by safe haven demand. However, conviction remains moderate as Thursday's ECB meeting could quickly change market sentiment, particularly if policymakers signal a more hawkish stance. Current market ranges imply potential swings of approximately £2,080 to £3,940 on transactions worth USD250,000, depending on the direction of the pair.

The outlook for GBPEUR remains neutral. Softer UK wages have weakened the case for further Bank of England tightening, but the UK's longer term interest rate advantage continues to provide support for sterling. The upcoming ECB decision will be the next key event for the pair. Current trading ranges suggest movements could affect the cost of purchasing EUR250,000 by between £2,547 and £3,289, making it an important period for businesses with euro exposure.

Bottom Line

The weaker UK wage figures have removed an important pillar of support for sterling, increasing confidence in a stronger US dollar over the short term. While the pound's outlook against the euro remains balanced, attention now turns to the ECB meeting on Thursday, which is expected to provide the next significant catalyst for European currency markets. Businesses with upcoming foreign exchange requirements should remain alert as both monetary policy expectations and geopolitical developments continue to drive market volatility.

21st July 2026

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