The pound edged higher against the dollar and held broadly steady against the euro on Monday, but fell sharply against the Japanese yen as markets weighed Britain’s economic policy outlook against a broader shift in global interest rates and risk sentiment.
Sterling rose 0.14% to $1.3573 and traded at 85.86 pence per euro, leaving it only marginally stronger against the common currency. Its biggest move was against the yen, where it fell 0.8% to 209.41 yen, its lowest level since February.
The moves came after British Finance Minister John Healey delivered his first major economic speech, outlining plans to give city regions greater powers to attract private investment as Prime Minister Andy Burnham’s government seeks to transfer more economic decision-making away from central government.
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Healey also emphasized fiscal discipline, efforts to reduce business and household costs, and measures to boost economic growth.
For currency traders, however, the speech offered few new signals capable of materially changing expectations for Britain’s fiscal or monetary outlook. Much of Healey’s emphasis on growth, deregulation and the cost of living continued policies associated with his predecessor, Rachel Reeves.
Attention is therefore shifting toward the government’s October Budget, where investors will look for greater clarity on how Healey intends to finance the government’s economic priorities while maintaining control of public finances.
Barclays said the transition from the traditionally quieter August trading period to a more closely watched policy environment could increase pressure on sterling. Higher global bond yields have also complicated the outlook for the currency.
“The August lull is giving way to a period of increased scrutiny on UK policies and fundamentals, shifting the risk-reward modestly to the downside for the pound,” Barclays analysts said.
Investors are especially focused on how the government will reconcile its growth agenda with spending demands in areas including housing, social care and defense. The more expensive the government’s commitments become, the greater the pressure on borrowing costs and the fiscal outlook could be.
The pound’s decline against the yen was considerably more pronounced as Japan’s currency strengthened against major currencies.
Sterling had reached a 19-year high against the yen in August, while the yen had also fallen to a 40-year low against the dollar. The subsequent reversal suggests that some of the extreme bearish positioning against the Japanese currency may be unwinding.
Possible repatriation of Japanese capital, the unwinding of carry trades and expectations that the Bank of Japan could accelerate interest-rate increases are providing support for the yen. Political pressure from Washington on Japan’s economic and currency policies could also influence expectations around the yen.
The yen’s recovery is significant for global markets because it can affect the carry trade, in which investors borrow in low-yielding currencies such as the yen to invest in higher-yielding assets elsewhere. A sustained rise in Japanese rates or the yen can make those positions less attractive and potentially trigger broader portfolio adjustments.
Meanwhile, global investors entered the week with a growing focus on inflation and interest rates as oil prices climbed amid the continuing U.S.-Iran conflict.
Brent crude rose 1.1% to $97.31 a barrel, while West Texas Intermediate gained 1.3% to $92.66, with both benchmarks reaching six-week highs.
The rise in energy prices is becoming a threat to the disinflation trend because higher fuel and transportation costs can feed into consumer prices while simultaneously reducing household purchasing power. That dynamic is of interest to central banks because higher inflation caused by an energy shock could limit their ability to cut interest rates or force policymakers to maintain restrictive settings for longer.
U.S. Treasury yields have already responded to those concerns. The benchmark 10-year Treasury yield last week reached its highest level since November 2023, while the two-year yield climbed to its highest level since January 2025.
“A run of central bank meetings over the coming weeks will test whether equity composure holds,” said Ed Yardeni, president of Yardeni Research. “Bond yields are also rising worldwide. The question is whether that reflects better-than-expected economic growth, higher-than-expected inflation, and/or looming fiscal debt crises.”
The Federal Reserve’s policy meeting next week will be a major test for markets. Traders were pricing a roughly 60% probability of a 25-basis-point rate increase, according to CME Group’s FedWatch tool.
Those expectations could shift rapidly with U.S. wholesale and consumer inflation data due later this week. Another sharp increase in crude prices could further complicate the Fed’s decision by raising inflation expectations while weakening economic activity.
U.S. equity futures also pointed to a cautious start to the week. Dow futures fell 308 points, or 0.6%, while S&P 500 futures declined 0.2%. Nasdaq-100 futures gained 0.1%. U.S. stock markets were closed Monday for the Labor Day holiday.
Geopolitical and trade risks added another layer of uncertainty.
Canada is due to impose retaliatory tariffs on about $20 billion of U.S. goods on Tuesday, escalating trade tensions with Washington. Trump also threatened Canadian aircraft manufacturer Bombardier with exclusion from the U.S. market unless the company begins manufacturing its products in the United States.
“NO MORE SELLING BOMBARDIER IN THE UNITED STATES!” Trump wrote on Truth Social.
The combination of higher oil prices, rising global bond yields, shifting central-bank expectations and renewed trade tensions leaves currency markets facing several competing forces.