Pound-Dollar Forecast: UK Fiscal Concerns Meet Rising Geopolitical Risks

Modified: Wednesday, 22 July 2026 20:11 BST - Written by Frank Davies

STORY LINK Pound-Dollar Forecast: UK Fiscal Concerns Meet Rising Geopolitical Risks

The Pound to Dollar exchange rate (GBP/USD) has remained under pressure, trading around 1.3380 after retreating from last week's two-month highs.

Sterling has been undermined by renewed concerns over the UK's fiscal outlook, while escalating tensions in the Middle East have boosted demand for the safe-haven US Dollar and lifted energy prices

GBP/USD Forecasts: One-Week Lows

The Pound to Dollar (GBP/USD) exchange rate remained under pressure on Wednesday as concerns over UK fiscal policy combined with escalating geopolitical tensions to support the US currency.

GBP/USD failed to regain the 1.3450 area earlier in the week and retreated to one-week lows near 1.3360.

The pair subsequently traded around 1.3375, extending its correction from last week’s two-month highs above 1.3550.

UK government bonds and Sterling have both been hurt by concerns surrounding the new government’s fiscal plans, while the worsening Middle East conflict has strengthened demand for the Dollar and pushed global bond yields higher.

Scotiabank has not shifted to a bearish GBP/USD stance at this stage; “Recent price action suggests a minor pullback from clear resistance around 1.3550, marking a pause in the recovery from the late June low in the mid-1.31s. We look to near-term support around 1.3350.”

A sustained break below 1.3350 would weaken the short-term technical outlook and increase the risk of a deeper correction.

Danske Bank remains more bearish over the medium term and expects GBP/USD to trade below 1.30 during 2027.

Following the surprise appointment of John Healey as Chancellor, markets have been monitoring fiscal developments closely.

The government announced that VAT on domestic electricity bills would be reduced to zero from 5%, with the measure intended to ease pressure on household finances.

Ministers said the policy would be funded by savings generated from cancelling the Digital ID programme.

Questions have nevertheless been raised over the funding calculation, with critics pointing out that some of the planned Digital ID expenditure had not yet been formally funded.

The development, together with Prime Minister Andy Burnham’s willingness to use flexibility within the fiscal rules, triggered fresh unease over the outlook for borrowing.

UK government bonds were subjected to further selling, with the 10-year gilt yield trading close to 5.06%.

Citi strategist Jamie Searle commented; “With Andy Burnham now installed as the new Prime Minister, and the speculation over Chancellor ending with the unexpected appointment of John Healey, the uncertainty facing gilts switches from political to policy.”

The Pound is likely to remain sensitive to movements in gilt yields, with investors looking for clearer evidence that the government’s new measures will be fully funded.

The latest UK inflation figures provided some relief, although renewed increases in global energy prices limited the positive market reaction.

Headline consumer-price inflation declined to 2.6% in June from 2.8% previously, beating consensus forecasts for a smaller decline to 2.7%.

The rate was the lowest since March 2025.

Core inflation held at 2.6%, rather than declining to 2.5% as expected, while services inflation eased slightly to 3.6%.

The softer headline figure reduced immediate pressure on the Bank of England to raise interest rates, but markets remain concerned that the renewed surge in oil and gas prices will push inflation higher again over the coming months.

Middle East Escalation Supports Dollar

Oil prices advanced to six-week highs above $95 per barrel as the United States and Iran continued to exchange attacks and fears intensified over disruption to Gulf energy supplies.

The increase in energy prices reinforced concerns over the global inflation outlook and contributed to further selling across international bond markets.

The Dollar also attracted defensive demand as investors responded to threats against shipping routes in the Middle East.

ING commented; “The FX market is gradually catching up with developments in the Gulf, where tensions still appear to be escalating, and the dollar has found broad-based support.”

It added; “FX markets may now be reacting less to the risk of sharp short-term spikes and more to the prospect of oil prices remaining elevated for longer. The bond sell-off and the spillover into equities reflect that shift.”

MUFG also highlighted the geopolitical risks; “Global energy supply risks have been reinforced as well yesterday by the threat from the Houthis, an Iran-backed Yemeni group, to impose a maritime blockade on Saudi Arabia.”

Elevated oil prices and fragile risk appetite should maintain near-term support for the Dollar, leaving GBP/USD vulnerable to a break below the 1.3350 support area.

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