Sterling Near Multi-Year High as Dollar Weakens

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.

Sterling settled around $1.38 at the end of January, close to a four-year high and recording a 2% gain over the month, fueled by US dollar weakness following the Federal Reserve’s decision to keep rates unchanged and President Donald Trump’s signals that the administration is comfortable with a weaker greenback. Fed Chair Jerome Powell highlighted a “clear improvement” in the US economic outlook and signs of a stabilizing labor market, but the comments did little to lift the soft dollar, which remained under pressure from ongoing policy uncertainty, including renewed tariff threats and criticism of the Fed’s independence, and government shutdown risks. In the UK, fresh BRC data indicated accelerating price pressures, reinforcing concerns over sticky inflation and potentially limiting the Bank of England’s scope to cut interest rates in the near term. Meanwhile, the Bank of England’s monetary indicators revealed lower-than-expected mortgage approvals and consumer credit for December.

Sterling held comfortably above $1.38, hovering near its strongest level since September 2021, as the US dollar resumed its decline following the Federal Reserve’s decision to keep rates unchanged and President Donald Trump’s signals that the administration is comfortable with a weaker greenback. Fed Chair Jerome Powell pointed to a “clear improvement” in the US economic outlook and said the labor market is showing signs of stabilizing, but the comments did little to lift the already soft dollar amid government shutdown worries, weak consumer confidence, and continued policy uncertainty in Washington, including renewed tariff threats and criticism of the Fed’s independence. In the UK, fresh BRC data showed accelerating price pressures, reinforcing concerns over sticky inflation and potentially limiting the Bank of England’s room to cut interest rates in the near term.