Pressure on sterling is intensifying as political uncertainty and shifting central bank expectations take centre stage. What does this mean for GBP and near-term FX risk?
Key Highlight
- Political headlines and BoE signals increase pressure across markets
Market Recap
Sterling weakened as political uncertainty in the UK met a more cautious Bank of England stance. Market focus has sharpened on domestic politics following the Mandelson episode, with upcoming by-elections and May’s local elections adding to the sense of instability.
On the policy front, the BoE’s narrow 5–4 decision to keep rates unchanged surprised markets and challenged expectations that rates would stay elevated for longer. New projections point to inflation easing more quickly than previously forecast, leading traders to factor in a growing likelihood of a rate cut as early as March. The pound reacted swiftly, recording its steepest fall against the euro since last summer, while derivatives markets show sentiment towards GBP turning increasingly negative against the dollar.
In contrast, the European Central Bank kept rates steady at 2.00%, sticking to a cautious, data-led approach. President Lagarde played down concerns around recent euro strength, a message that helped push German bond yields modestly higher.
Market Overview:
Sterling remains exposed as UK political uncertainty continues to weigh on UK assets, while softer messaging from the Bank of England reduces the pound’s interest-rate advantage. With recent positioning starting to unwind, downside risks for GBP still appear skewed lower — particularly against the euro and US dollar. While the currency has seen a modest bounce from earlier lows as buyers re-enter, this looks more like short-term stabilisation than a change in direction unless the underlying backdrop improves.
The euro is trading on firmer footing, underpinned by consistent guidance from the ECB and President Lagarde’s reassurance around recent EUR strength. In the US, signs of cooling in the labour market have yet to materially weaken the dollar. Instead, the greenback continues to find support from softer commodity prices, including gold and silver.#
6th February 2026
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