Pound Sterling Crashes Against Euro and Dollar After UK Debt Fears Explode

Modified: Tuesday, 2 September 2025 17:33 BST - Written by Tim Boyer

STORY LINK Pound Sterling Crashes Against Euro and Dollar After UK Debt Fears Explode

The Pound to Dollar (GBP/USD) and Pound to Euro (GBP/EUR) exchange rate outlook has deteriorated sharply, with Sterling crashing to multi-week lows as investors dump UK assets.

The GBP/USD rate dropped to 3-week lows below 1.3350 before rebounding modestly above 1.34, while GBP/EUR slid to fresh 3-week lows near 1.1480.

Mounting fears over Britain’s debt burden, talk of looming tax hikes, and collapsing confidence in the government’s fiscal strategy have left the currency reeling against both the euro and the dollar. Bond markets have turned hostile, with soaring gilt yields fuelling comparisons to an emerging-market style crisis and deepening pressure on the UK government.

Currency analysts warn that UK fiscal worries, fragile risk appetite, and stubborn inflation are clouding the British Pound’s outlook, leaving forecasts tilted toward further volatility against both the Euro and the Dollar.

GBP Forecasts: Pound Fresh 3-Week Lows vs Euro, Dollar

Sterling posted heavy losses into the US open amid indiscriminate selling before a selective recovery later in New York as gilts rallied and the dollar faded.

Concerns over long-term debt dynamics hurt the Pound amid weaker risk conditions as bond vigilantes stalked global markets.

The Pound to Dollar (GBP/USD) exchange rate slumped to 3-week lows below 1.3350 before a rebound to above the 1.3400 level.

Gold continued to post record highs, illustrating underlying global stresses.

The Pound to Euro (GBP/EUR) exchange rate also remained under pressure with a slide to 3-week lows near 1.1480.

UK bonds remain a key talking point, especially with the Bank of England facing an extremely difficult task in settling policy.

Allianz adviser Mohamed El-Erian commented; “Yields on longer-dated government bonds in advanced countries continue to rise, with the UK notably experiencing this alongside a weaker currency—similar to what is more usual for developing countries.”

UK bond markets did stabilise later in the session with the 10-year yield edging below the 4.80% level from 4-month highs above 4.83% earlier.

The 30-year yield also declined to 5.69% from 27-year highs above 5.73%.

As far as data is concerned, the US ISM manufacturing index edged higher to 48.7 for August from 48.0 previously, but slightly below expectations of 49.0 and the 6th successive monthly contraction.

There was a limited bounce in new orders, but employment continued to decline.

The ISM noted; “an acceleration of headcount reductions due to uncertain near- to mid-term demand.”

Prices continued to increase at a strong rate with the 7th successive reading above the 60.0 level.

The data will maintain fears over stagflation in the US economy which is not a recipe for sustained dollar strength.

There are major data releases throughout the week with markets also assessing the potential for stronger underlying dollar demand.

ING commented; “US corporates have a big tax date on 15 September, where dollar payments occasionally cause ripples in US money markets.”

The headline Euro-Zone inflation rate edged higher to 2.1% from 2.0% with the core rate holding at 2.3%, further dampening any expectations of a September ECB rate cut and underpinning the Euro.

ING is not convinced that the rate-cutting cycle is over; “With interest rates set at neutral levels, you could argue that this is a logical time for the ECB to keep rates on hold. But still, with slow growth, significant risks of downside surprises still prevalent, and the Federal Reserve expected to resume cutting rates again, the doves on the governing council could still push for one more cut before holding steady.”

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TAGS: Pound Dollar Forecasts Pound Euro Forecasts