Sterling Holds Below Four-Year High Amid UK Political Uncertainty

The British pound traded near $1.365, remaining below the late-January peak of $1.387, its strongest level in more than four years, as investors assessed fresh political developments in the UK. Sterling came under pressure after Prime Minister Keir Starmer’s chief of staff, Morgan McSweeney, resigned amid the Lord Peter Mandelson scandal, fueling speculation about Starmer’s leadership. Tensions escalated when Scottish Labour leader Anas Sarwar publicly called for the prime minister to step down. However, support from cabinet members and across the Labour Party helped steady sentiment, suggesting Starmer has, at least for now, weathered the challenge. At the same time, rising expectations of further Bank of England rate cuts have weighed on the currency. Although the central bank left its benchmark rate unchanged at 3.75% in a split decision, policymakers struck a more dovish tone than expected, indicating that CPI inflation is likely to return toward the 2% target from April.

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.