The pound rose on Friday, regaining some of the losses suffered the previous day after the Bank of England (BoE) left interest rates unchanged and hinted at potential cuts if inflation continues to ease.
Sterling climbed 0.4% to $1.3581 by mid-morning in London, partially recovering from Thursday’s near-1% drop to 10-day lows. Against the euro, the pound strengthened as the euro fell 0.2% to 86.88 pence, following its largest one-day rally against sterling since last August.
The European Central Bank also held rates steady on Thursday but signaled no immediate plans to reduce borrowing costs, despite inflation running below its 2% target.
Traders, who expect the BoE to cut rates twice this year, are navigating a complicated political landscape. Prime Minister Keir Starmer faces intense scrutiny, including from his own Labour Party, over his December 2024 appointment of Peter Mandelson as Britain’s ambassador to Washington amid Mandelson’s known ties to the late U.S. sex offender Jeffrey Epstein.
Earlier this week, concerns over Starmer’s position drove gilt yields higher, although the rise reversed following the BoE decision.
“The market struggles to fully price two 25-basis point cuts this year — likely due to politics,” said ING strategist Chris Turner. “Any leadership challenge to Starmer, and the expected leftward shift in policy, could leave the gilt market vulnerable and delay a BoE easing cycle. Despite dovish BoE guidance, 30-year UK gilt yields ended higher yesterday.”
Turner added: “We see room for sterling to stabilize. EUR/GBP should find support at 0.8670–0.8680, with potential to rise to 0.88 over the next month as political pressure on Starmer persists and economic data builds the case for a March BoE rate cut.”