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.”

Gold prices fell by more than 1% in European trading on Tuesday, slipping below the $5,000 per ounce level, and heading toward their first loss in the past three sessions, under pressure from a rebound in the US dollar ahead of key US economic data releases.

A series of critical US economic reports is expected to provide strong signals about the future path of Federal Reserve interest rates, especially as markets still rule out a rate cut in March.

Price overview

• Gold prices today: Gold fell by 1.4% to $4,987.68, from the opening level at $5,058.68, and recorded a session high at $5,076.01.

• At Monday’s settlement, gold prices rose by 1.9%, marking the second consecutive daily gain, supported by weakness in the US dollar.

The US dollar

The US Dollar Index rose by more than 0.1% on Tuesday, as part of recovery attempts from a two-week low, reflecting a rebound in the US currency against a basket of global currencies.

Aside from buying from low levels, the dollar’s rebound comes as investors refrain from opening new short positions ahead of a batch of important US economic data.

US interest rates

• San Francisco Federal Reserve President Mary Daly said on Friday that she believes one or two additional rate cuts may be needed to address weakness in the labor market.

• According to the CME FedWatch tool, pricing for keeping US interest rates unchanged at the March meeting stands at 83%, while the probability of a 25 basis point rate cut is priced at 17%.

• To reprice these expectations, investors are closely watching upcoming US economic data, in addition to monitoring comments from Federal Reserve officials.

• US retail sales data is due later today, the delayed jobs report will be released on Wednesday, weekly jobless claims on Thursday, and key inflation data for January on Friday.

• White House economic adviser Kevin Hassett said on Monday that US job gains may be lower in the coming months due to slower labor force growth and higher productivity.

Gold outlook

Market strategist Ilya Spivak said that the cold war and economic competition between the United States and China are likely to persist for years, meaning gold maintains a broader upward bias, with the key question being how short-term Federal Reserve policy expectations will affect prices.

He added that gold is pulling back toward the $5,000 per ounce level from its recent high-low range, while silver is showing greater volatility in speculative trading.

SPDR fund

Holdings of the SPDR Gold Trust, the world’s largest gold-backed ETF, increased on Monday by about 3.43 metric tons, bringing the total to 1,079.66 metric tons, rebounding from 1,076.23 metric tons, which was the lowest level since January 15.

The euro declined in European trading on Monday against a basket of global currencies, posting its first loss in three days versus the US dollar, and pulling back from a two-week high, due to correction and profit-taking activity, in addition to attempts by the US currency to recover ahead of key US economic data releases.

Following the European Central Bank’s first monetary policy meeting of this year, expectations for a European rate cut in March have eased, despite the recent slowdown in inflationary pressures. To reprice those expectations, traders are awaiting further economic data from the euro area.

Price overview

• Euro exchange rate today: The euro fell against the US dollar by 0.15% to $1.1897, from today’s opening level at $1.1914, and recorded a session high at $1.1917.

• The euro ended Monday’s session up 0.85% against the dollar, marking its second consecutive daily gain, and recorded a two-week high at $1.1927, due to mounting negative pressure on the US currency.

The US dollar

The US Dollar Index rose by more than 0.1% on Tuesday, as part of recovery attempts from a two-week low, reflecting a rebound in the US currency against a basket of major and minor currencies.

Aside from buying from low levels, the dollar’s rebound comes ahead of the release of key US economic data on monthly retail sales, which will provide strong evidence about the pace of US economic growth in the first quarter of this year.

European interest rates

• The European Central Bank kept its main interest rates unchanged last week at 2.15%, the lowest level since October 2022, marking the fifth consecutive meeting without a change.

• ECB President Christine Lagarde said the bank is not committed to a pre-set path for rate cuts, noting that the March decision will depend entirely on incoming data in the coming weeks.

• Lagarde confirmed that the ECB is closely monitoring the euro exchange rate, considering that the current strength of the single currency helps curb imported inflation and may speed progress toward targets without the need for further tightening.

• After the meeting, money market pricing for a 25 basis point ECB rate cut in March declined from 50% to 30%.

• To further reprice these expectations, investors are waiting for more euro area data on inflation, unemployment, and wages.

The Australian dollar declined in Asian trading on Tuesday against a basket of major and minor currencies, pulling back from its highest level in three years versus the US dollar, due to correction and profit-taking activity, in addition to attempts by the US currency to recover ahead of key US economic data releases.

Following the latest meeting of the Reserve Bank of Australia, expectations have increased that the bank could raise Australian interest rates in May. To reprice those expectations, traders are awaiting further economic data from Australia.

Price overview

• Australian dollar exchange rate today: The Australian dollar fell against the US dollar by 0.3% to 0.7072, from today’s opening level at 0.7094, and recorded a session high at 0.7095.

• The Australian dollar ended Monday’s session up 1.15% against the US dollar, marking its second consecutive daily gain, and recorded a three-year high at 70.99 cents, amid renewed selling pressure on the US currency.

The US dollar

The US Dollar Index rose by more than 0.1% on Tuesday, as part of a recovery attempt from a two-week low, reflecting a rebound in the US currency against a basket of major and minor currencies.

Aside from buying from low levels, the dollar’s rebound comes ahead of the release of key US economic data on monthly retail sales, which will provide strong evidence about the pace of US economic growth in the first quarter of this year.

Australian interest rates

• Earlier this month, the Reserve Bank of Australia’s monetary policy committee decided to raise the benchmark interest rate by 25 basis points to 3.85%, marking the first Australian rate hike since November 2023, after keeping rates unchanged over the previous three meetings.

• RBA Governor Michele Bullock said that inflation remains too high and cannot be allowed to get out of control, adding that there are concerns inflation could remain elevated.

• After the February meeting, pricing for a 25 basis point rate hike in March remained below 50%.

• Pricing for a 25 basis point rate hike in May rose to above 80%.

• To further reprice these expectations, investors are waiting for additional data on inflation, unemployment, and wages in Australia.