Pound Falls as Weak Labor Data Fuels BoE Cut Bets

Sterling hovered around the $1.36 level as investors assessed weaker-than-expected UK growth figures. Data from the Office for National Statistics showed the economy expanded by 0.1% in Q4 2025, matching the previous quarter’s pace but falling short of forecasts for 0.2%. On an annual basis, GDP rose 1.0%, below expectations and marking the slowest expansion since Q2 2024. Monthly data also pointed to unexpected contractions in both industrial output and construction, underscoring the fragility of the recovery. The disappointing figures capped a challenging year for the UK economy and added to political pressures facing Prime Minister Keir Starmer. Meanwhile, investors continued to price in further monetary easing from the Bank of England. Although policymakers left interest rates unchanged at 3.75% in a split decision, they struck a more dovish tone, signaling that inflation is likely to move back toward the 2% target from April.

The British pound trimmed earlier gains to trade around $1.365, as the USD strengthened following stronger-than-expected US jobs data. Payrolls increased by 130,000 in January, the largest rise in over a year, while the unemployment rate unexpectedly fell to 4.3%, prompting investors to scale back expectations for near-term Federal Reserve rate cuts. Markets now fully price in a Fed move by July rather than June, with less than a 5% chance of a March cut. Sterling drew some support from easing political uncertainty at home, as Prime Minister Keir Starmer secured backing from senior cabinet members and across the Labour Party after his chief of staff, Morgan McSweeney, resigned amid the Lord Peter Mandelson scandal. Meanwhile, investors continued to anticipate further easing from the Bank of England. Although rates were left unchanged at 3.75% in a split decision, policymakers signaled a more dovish stance, indicating inflation is likely to move back toward the 2% target from April.

The British pound advanced toward $1.37, rebounding from recent volatility and edging closer to its late-January high of $1.387, as the US dollar weakened ahead of the closely watched January jobs report. The data is expected to show a modest pickup in hiring, though uncertainty remains after several US officials, including White House economic adviser Kevin Hassett, warned that job growth could slow in the months ahead. Sterling also found support as political tensions in the UK eased. Prime Minister Keir Starmer secured backing from cabinet members and across the Labour Party following the resignation of his chief of staff, Morgan McSweeney, amid the Lord Peter Mandelson controversy. Meanwhile, markets continued to price in further rate cuts from the Bank of England. Although the central bank kept its benchmark rate unchanged at 3.75% in a split vote, policymakers adopted a more dovish tone, signaling that inflation is likely to move back toward the 2% target from April onward.