August 2026 Currency Market Update

A new Prime Minister, a new Chancellor, and four central banks pulling in different directions. July gave the pound plenty to digest, and August looks anything but quiet.

The Pound

New PM, New Chancellor, and a Divided Bank

Andy Burnham was confirmed as Prime Minister on 17th July and moved quickly to appoint John Healey as Chancellor rather than the widely tipped Ed Miliband. Gilt yields jumped to a two month high on the news and the pound slipped against the dollar, as investors weighed whether Healey's reputation for wanting more spending, not less, would sit comfortably with a bond market already asking questions about the public finances. The Bank of England held Bank Rate at 3.75% for a fifth meeting running, but three of its nine committee members voted for an immediate rise to 4%, a more hawkish split than markets had expected.

The domestic data underneath is mixed. New car registrations rose 11.7% in July against a year earlier, but that was driven largely by Chinese electric vehicles, now above 19% market share, flattered by fleet sales and heavy discounting rather than broad-based strength. At the same time, PMI surveys point to the longest hiring slump since the 2008 to 2009 financial crisis, even as the official labour figures paint a healthier picture. Sterling has held up, but mostly on the rate gap and external factors rather than any domestic momentum.

The next real test is the Budget on 28th October, the new government's first, and the gilt market has already shown how quickly it will move on fiscal news. For UK businesses with currency exposure, the point is that the pound's summer firmness rests on fairly shaky domestic foundations. It's worth reviewing your hedging position before the autumn rather than after it.

The US Dollar

Safe Haven Bid Returns as Warsh Takes Over

Weak US jobs data early in July pulled the dollar down and sterling briefly touched its best levels since May. The mood then shifted as tensions between the US and Iran escalated, sending oil towards $90 a barrel and reviving demand for the dollar as a safe haven. New Fed chair Kevin Warsh stripped back the central bank's usual forward guidance ahead of the end of month meeting, where it held rates on 29th July, though three regional presidents dissented in favour of a hike, a split Warsh called a "good family fight."

Warsh has stayed deliberately opaque on the path for rates. He's argued that higher rates could form part of the solution to bringing inflation under control, while stressing that convincing markets of the Fed's medium term commitment matters more. A Wall Street Journal report of regular contact between President Trump and Warsh, reportedly on geopolitics and AI rather than rates directly, adds to the sense that the usual signals are harder to read. Meanwhile a possible deal between Iran and Oman to reopen the Strait of Hormuz could cap oil and gas prices, taking some of the heat out of the safe haven trade.

For anyone with dollar exposure, the combination of a hawkish leaning but unpredictable Fed and oil-driven swings in risk sentiment means GBPUSD could stay choppy into autumn. The pound gave back ground over the month, and two-way risk is the sensible base case.

The Euro

Sterling Near a One-Year High as the Rate Gap Bites

The 150 basis point gap between the Bank of England's 3.75% and the European Central Bank's 2.25% did most of the work, pushing the pound to its strongest against the euro in almost a year during the middle of July. The ECB held on 23rd July but did so with a hawkish tone, and traders are now pricing a possible eurozone rate rise as soon as September. The euro has since clawed back roughly half of what it lost earlier in the summer.

The data is uneven. German factory orders jumped 3.1% month on month in June, well above the 0.5% expected, but construction stayed weak and the carmakers continue to struggle against competition and soft domestic demand. Lower energy prices and sluggish activity don't obviously argue for a September hike, yet the Governing Council appears more worried about inflation risks than most of its peers.

If the ECB does move, the euro may still struggle to build on it given the underlying weakness. For UK importers paying in euros, the pound's near one-year high is a window worth a look. For exporters earning in euros, the risk runs the other way.

Australia and New Zealand

The Australian dollar has held its ground. After three rate rises earlier in the year took the cash rate to 4.35%, the Reserve Bank of Australia has settled into a holding pattern, with most economists now pushing any prospect of a cut into 2027. That steady backdrop, plus resilient data, kept the pound on the defensive against the Aussie through July. The RBA's next decision falls in mid-August, and another hold looks most likely.

New Zealand is where last month's forecast played out fastest. The Reserve Bank of New Zealand lifted the Official Cash Rate to 2.50% on 8th July, its first hike since 2023, with a more hawkish tone than expected and a signal that further tightening may be needed. The kiwi has rallied since, and the pound has given up close to 2% against it in a month, a reminder of how quickly a single rate decision can move a pair.

The Month Ahead

August has a reputation for being quiet, thinner trading and more people on holiday, but currency markets rarely read the same forecast. Both the Fed and the Bank of England have shown they are more divided than their headline holds suggest, so any shift in tone from either is worth watching, alongside the RBA's meeting in mid-August and whatever the RBNZ signals before autumn. UK fiscal policy under Burnham and Healey remains an open question too, given how quickly gilt yields moved on the reshuffle alone. Worth keeping half an eye on the headlines, even from a deckchair.

Current Market Rates — 7th August 2026

GBPEUR (Current) 1.1670 (High) 1.1827 (Low) 1.1368

GBPUSD (Current) 1.3450 (High) 1.3869 (Low) 1.3140

EURUSD (Current) 1.1520 (High) 1.2081 (Low) 1.1324

Rates shown are indicative mid-market rates for reference only.

Want to discuss how these moves affect your business? Get in touch with the Pathfinder FX team. desk@pathfinder-fx.com