Sterling Weakens to 7-Month Low

Sterling edged back toward $1.36 at the end of a volatile week that nonetheless put sterling on track for its sharpest weekly decline against the dollar since late October, driven by a mix of political turbulence and a more dovish-than-expected message from the Bank of England. Sterling came under pressure as political uncertainty flared on Thursday, with questions raised over the durability of Prime Minister Keir Starmer’s leadership following his appointment of Peter Mandelson as UK ambassador to the US, a move that drew scrutiny due to Mandelson’s past links to Jeffrey Epstein. On the policy front, the BoE left interest rates unchanged but surprised markets with a narrow 5–4 vote to hold. Four MPC members supported an immediate 25 bp cut, citing expectations that inflation will fall back toward the 2% target from April. The Bank noted that risks from persistent inflation have eased, while downside risks from weaker demand and a softening labor market have become more pronounced.

The British pound fell below $1.36, its weakest level since January 22, after the Bank of England left interest rates unchanged at 3.75% but struck a more dovish tone than markets had anticipated. While the decision to hold was widely expected, the vote split surprised investors, with policymakers narrowly voting 5–4 in favor of keeping rates steady. Four MPC members backed an immediate 25 basis point cut to 3.5%, arguing that CPI inflation is expected to fall back towards the 2% target from April. The Bank said risks from persistent inflation have continued to diminish, while downside risks linked to weaker demand and a loosening labor market have become more prominent. Sterling was also pressured by rising political uncertainty, as questions emerged over the durability of Prime Minister Keir Starmer’s leadership following his appointment of Peter Mandelson as UK ambassador to the US, a move drawing scrutiny due to Mandelson’s past links to Jeffrey Epstein.

The British pound weakened to around $1.37, moving further below the August 2021 high of $1.3847 reached on January 27, as investors positioned cautiously ahead of the Bank of England policy decision. Markets largely expect the BoE to hold rates at 3.75% this week. Looking ahead, expectations for rate cuts have been scaled back, with investors pricing less than a 50% chance of more than one cut this year, reflecting resilient UK data and persistently high inflation. Britain’s inflation remains the highest among G7 peers, while recent manufacturing PMI data showed activity at its strongest since August 2024, reinforcing the case for policy patience. However, the pound has faced pressure from a firmer US dollar following shifts in Federal Reserve leadership expectations and reduced bets on US rate cuts.