Sterling Slides as BoE Turns More Dovish

The British pound steadied around $1.36, remaining below the more than four-year high of $1.387 reached at the end of January, as mounting political uncertainty and shifting monetary policy expectations pressured the currency. Turmoil intensified after Prime Minister Keir Starmer’s chief of staff, Morgan McSweeney, resigned over the weekend, fueling speculation about Starmer’s leadership. The Prime Minister is facing renewed calls to step down from within a restless Labour Party following controversy surrounding his appointment of Peter Mandelson as UK ambassador to the US, a decision that has drawn scrutiny over Mandelson’s past links to Jeffrey Epstein. At the same time, growing expectations of additional Bank of England rate cuts have added to downward pressure on sterling. Although policymakers held interest rates at 3.75% in a split vote, they adopted a more dovish tone than anticipated, signaling that CPI inflation is likely to return to the 2% target from April.

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.