Sterling softens amid renewed UK political uncertainty – Scotiabank

The Pound Sterling (GBP) is slightly weaker against the dollar, underperforming most G10 peers as renewed political uncertainty triggers brief volatility in the gilt market, Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret report.

Gilt volatility weighs on Pound

“The pound is soft, down a fractional 0.1% vs. the USD and relative underperformer against all of the G10 currencies with the exception of JPY. Renewed political uncertainty appears to generating some modest turbulence in the UK gilt market with yields jumping (and subsequently reversing) about 4bpts on rumors of a potential challenge to PM Starmer’s leadership.”

“The prospect of renewed political uncertainty is a negative for the UK and the GBP, given the market’s sensitivity to the country’s fiscal situation following the ‘Truss moment’ of 2022 and its miniature reprisal last summer as markets assessed Chancellor Reeves’ budget.”

“Thursday’s release of public sector borrowing data came in slightly better than expected, and followed mixed CPI and employment releases earlier in the week. Domestic risk remains elevated into the end of the week as we look to Friday’s retail sales and preliminary PMI’s, which will be critical for BoE policymakers (and their tone) as we look to the next decision on February 5th.”