Pound, Euro and US Dollar Exchange Rate Forecast: FX Market Update and Business Outlook

Key Highlight

• Dollar softens as risk appetite improves Signs of progress towards a temporary US and Iran agreement eased concerns over energy supply disruption, sending oil prices lower and helping global equity markets reach fresh record highs. This reduced demand for the US dollar overnight, leading to broad based weakness across major currencies.

• Sterling loses interest rate support Markets have now removed expectations for the Bank of England to deliver another 25-basis point rate increase in 2026. With lower oil prices easing inflation concerns, sterling has lost one of its strongest recent supports, particularly against the euro.

• Yen weakness remains the longer-term trend Despite coordinated intervention last week and continued support from the US Treasury, the yen has struggled to extend its recovery. Markets are pricing around a 59% chance of a Bank of Japan rate hike in September, but the broader outlook continues to favour a weaker yen.

Market Recap

Market sentiment improved overnight after reports of progress towards a US and Iran interim agreement reduced geopolitical concerns. Oil prices moved lower while global equity markets climbed to record highs, placing broad pressure on the US dollar.

Sterling also faced renewed pressure after investors fully priced out the final expected Bank of England rate increase this year. The shift in interest rate expectations removed a key advantage for the pound, particularly against the euro.

The New Zealand dollar was the weakest performing G10 currency after unemployment climbed to 5.6%, its highest level in 11 years and above market expectations.

Meanwhile, the yen remained subdued despite recent intervention, with USDJPY little changed as investors continued to question whether the Bank of Japan will deliver enough tightening to support the currency.

Market Overview

The euro continues to benefit from expectations that the European Central Bank will maintain a firmer policy stance than the Federal Reserve. Near term conviction for euro strength stands at 65%, increasing to 70% over the medium term. However, today's ADP employment data and Friday's US payroll figures remain key events that could shift expectations if they point to stronger US inflation.

For businesses buying euros, a move back to the three month high would save approximately $6,825 per €250,000, while a return to the three month low would increase costs by around $4,975.

Sterling is expected to retain a modest advantage against the US dollar, with conviction at 60% in both the near and medium term. Any further gains are likely to depend more on continued dollar weakness than on domestic UK fundamentals, following the reduction in Bank of England rate expectations.

For businesses buying US dollars, a return to the three month high would reduce costs by approximately £2,055 per £250,000, while a move back to the three month low would increase costs by around £3,215.

The strongest conviction remains for euro strength against sterling. Near term conviction is 70%, rising to 80% over the medium term, supported by the policy divergence between the European Central Bank and a Bank of England that is now expected to remain on hold.

For businesses buying euros, a return to the three month high would reduce costs by approximately £2,420 per £250,000, while a move back to the three month low would increase costs by around £3,455.

Elsewhere, GBPJPY strengthened to 212.18 as the yen's recovery lost momentum. GBPNOK at 12.83 and GBPCAD at 1.8938 remain sensitive to developments in the Middle East, with any setback in negotiations likely to lift oil prices and quickly reverse recent currency moves.

Bottom Line

Markets are starting the day with a weaker US dollar as optimism surrounding US and Iran negotiations improves overall market sentiment. Attention now turns to today's ADP employment report, ISM Services data and UK two year gilt yields, all of which could influence expectations for interest rates and determine whether the dollar's weakness continues or begins to reverse.

5th August  2026

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