Political uncertainty and economic weakness weigh on GBP
Written by
Daily Currency Update
The sluggish economic performance of the UK since Labour’s landslide election victory in July, is beginning to weigh on sterling, with FX markets increasingly attentive to the UK's political landscape.A recent poll signalled a potential shift in parliamentary dynamics. If an election were held tomorrow, Labour would secure just 200 seats - less than half its current total - while the Conservatives would take 190, Reform UK 102, and the Liberal Democrats 70. With 326 seats required for a majority, either Labour or the Conservatives would need multiple coalition partners to govern, raising concerns about political instability and its impact on investor confidence in the pound.
Sterling traders will also be watching key economic data this week, with expectations that Britain’s economy contracted by 0.1% in Q4 2024, following stagnation in the previous quarter. A confirmed downturn could reinforce expectations of Bank of England rate cuts, adding further pressure on GBP.
Key Movers
Tariffs remain a key driver of market uncertainty, with President Trump’s latest announcement on Sunday set to keep investors on edge. His threat of reciprocal tariffs to match those imposed on the U.S., along with a 25% levy on steel and aluminium imports, has heightened concerns over global trade tensions.FX markets were already unsettled heading into the weekend, as US consumer sentiment fell to 67.8 in February - below the expected 71.3 - while inflation expectations surged to 4.3%. This spike in inflation forecasts signals potential economic strain from tariffs and reinforces the Federal Reserve’s cautious stance on interest rate cuts. The combination of trade policy uncertainty and inflation risks is likely to sustain volatility in currency markets, with the US dollar remaining sensitive to further developments.
Expected Ranges
- GBP/USD: 1.2355 - 1.2425 ▼
- GBP/EUR: 1.1985 - 1.2055 ▲
- GBP/AUD: 1.9705 - 1.9785 ▼
- EUR/USD: 1.0265 - 1.0345 ▼