GBP came under renewed pressure as UK political uncertainty collided with a dovish Bank of England. Markets are increasingly focused on questions over PM Starmer’s leadership after the Mandelson controversy, with the Gorton & Denton by-election and May local elections looming.
The BoE’s 5–4 vote to hold rates stunned markets, undermining the “higher-for-longer” narrative. Updated forecasts now show inflation falling faster than expected, and markets are pricing a meaningful chance of a March rate cut. GBP reacted sharply – posting its largest drop versus the EUR since last summer, with options markets signalling the most negative sentiment against USD in two months - positioning is starting to turn against the GBP.
Elsewhere, the ECB left rates at 2.00% as expected, taking a data-dependent, meeting-by-meeting approach. Lagarde downplayed concerns over recent EUR strength, nudging German yields slightly higher.
US job data added to the cautious mood: December JOLTS showed the lowest job openings since September 2020, Challenger layoffs in January were the largest since the GFC, and initial claims were above expectations. The trend points to a softening job market.
*Daily move - against G10 rates as of 17:00 GMT, 05.02.26
** Indicative rates - interbank rates as of 17:00 GMT, 05.02.26
GBP is vulnerable. Political risk is feeding directly into UK assets, while dovish central bank signals remove some of the currency’s rate support. The “pain trade” for GBP looks lower, particularly versus EUR and USD, as positioning unwinds. GBP is staging a tentative rebound from this morning’s lows as buyers step back in to provide near-term support. Barring any meaningful shift in the underlying fundamentals.
EUR is holding steady, supported by ECB clarity and Lagarde’s calm on EUR strength. The weaker job trend in the US isn't quite feeding into the value of USD, with the greenback benefitting from weaker commodity prices, namely gold and silver.
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