Sterling declines as eyes fixed on UK policy

The British pound fell against the US dollar and the euro on Tuesday, as the broad selloff in the US currency eased, while ongoing concerns about the political situation in the UK and the Bank of England’s policy outlook continued to weigh on sterling.

UK two-year government bond yields were little changed after having dropped about 11 basis points since Thursday, when the Bank of England left interest rates unchanged following a narrow and unexpected 5–4 vote.

The central bank also said borrowing costs are likely to decline if the expected slowdown in inflation continues in the coming period.

Starmer will not resign

UK Prime Minister Keir Starmer rejected calls for his resignation on Monday after a second adviser stepped down from a team facing a crisis linked to the appointment of Peter Mandelson as ambassador to Washington.

Former Deputy Prime Minister Angela Rayner, who is viewed as a potential rival, announced her support for Starmer on Monday.

Lee Hardman, senior currency analyst at MUFG, said sources inside the Labour Party reported strong resistance within the party to launching a leadership challenge ahead of local elections scheduled for May.

He said this development “should help reduce the risk of a sharper near-term selloff in the British pound.”

The euro rose 0.26% against sterling to 87.19 pence, after reaching 86.96 pence on Monday, its highest level since January 21.

Michael Pfister, FX analyst at Commerzbank, said: “It remains questionable whether Starmer will still be prime minister by the end of the year, despite his strong win in the 2024 election and his efforts to establish stability,” while also noting early signs of recovery in the UK economy and easing inflation pressures.

He added: “Sterling is currently suffering from uncertainty, and this is likely to persist until the issue is resolved in a sustainable way.”

Against the dollar, the pound fell 0.2% to $1.3669.

The US dollar was broadly steady against European currencies ahead of key US economic data due on Wednesday.

Enrique Díaz-Álvarez, chief economist at global financial services firm Ebury, said that “the risk of a leftward shift within the government — particularly under a Labour leadership led by Angela Rayner — represents a downside risk for sterling and for UK assets in general.”