Sterling weakened on Tuesday, as a broad AI-driven equities selloff boosted the dollar, and faces a challenging outlook over the next week or so as the market awaits more news on the next UK government after the resignation of Keir Starmer.

Though losing ground, sterling was performing better than most major currencies, except the yen, on Tuesday. Trader focus remains on the downside, including critical support levels below 1.32, in the face of broad dollar strength.

Though sterling initially rose after Starmer's resignation announcement -- which ended the weeks of speculation that had dogged the pound -- focus is now on who will take the role of finance minister due to fiscal concerns that held sway over gilts and British currency.

Meanwhile, Fed-BoE rate expectations are shifting decisively in favour of the dollar. LSEG's IRPR data is discounting 38bp of Fed tightening by year-end versus 27bp frome the BoE. Critically, the Fed's first move is anticipated in September, whereas the BoE is not expected to hike until Q4 2026—a timeline differential that narrows the UK rate advantage that had previously supported sterling.

Technically, should support at 1.3160 — the March 31 low — give way, bears are likely to target November 2025 lows just above 1.30. On the topside, the June 22 high at 1.3272 acts as initial resistance, with a more significant hurdle for bulls at the falling 10-day moving average around 1.3323.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)