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The prime minister's future seemed a little safer yesterday, but there are still major risks for the pound.
A defiant Sir Keir Starmer vowed yesterday to “never walk away from the country I love” amid a damaging political crisis that has sent the pound tumbling in the past week.
Government borrowing costs (represented by yields on the short and long end of the curve) fell yesterday and the pound was largely stable as more cabinet ministers came to the prime minister’s defence. However, sterling sits below where it was a week ago against the US dollar and the euro, reflecting the elevated political risk.
The big story when it came to economics was an unexpectedly poor showing in the American retail sector. Sales were unchanged from the month prior in December (missing forecasts of a 0.4% increase), with the Christmas buying period resulting in increased spending on gift items like sport equipment and musical instruments alongside sharp falls in spending on furniture and white goods.
Tuesday was another wobbly session for stock markets. Weighed down by the dramatic rotation out of tech and software, along with the retail sales miss, the mood was very much risk-off and most gains were limited to modest levels.
Ahead of next week’s unemployment data, the head of UK supermarket giant Tesco warned the country was sleepwalking into a jobless ‘epidemic’. With the headline unemployment rate camped at 5.1%, CEO Ashwin Prasad called for businesses and the government to work together to arrest the slide.
The back end of this week is the key time for high-impact data. January’s delayed non-farms payroll report arrives from America this afternoon ahead of GDP for the UK on Thursday. These data points are likely to provide fresh direction for the pound to US dollar rate.
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GBP: Starmer survives for now
The prime minister withstanding calls to stand down had a stabilising effect on the pound yesterday. But few expect the calm to last long, with some political risk still being priced into sterling ahead of the May local elections. It has been suggested that backbenchers and leadership hopefuls are simply waiting for a suitable justification to launch their next revolt.
GBP/USD: the past year
EUR: Holding its ground
The euro held steady against its key rivals on Tuesday and remains within touching distance of a four-year high over the US dollar. The absence of substantive data limited the euro’s ability to make further headway.
GBP/EUR: the past year
USD: Lutnick sets lofty goals
Commerce secretary Howard Lutnick is not buying into American pessimism. In a wide-ranging hearing in Congress yesterday, Lutnick predicted annualised growth could hit 6% in the first quarter of 2026. He was also forced to acknowledge he had visited Jeffrey Epstein’s island in 2012 as the backlash to his ties with the disgraced financier grew.
EUR/USD: the past year
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