Political risks to pound ahead of Gordon and Denton by-election
|Economic news out of the UK last week had mixed implications for sterling. On the one hand, economic activity appears to be holding up quite well. Retail sales jumped in January by the most in nearly four years on an annual basis, and the composite PMI of business activity surprised to the upside, which has slightly dented market expectations for Bank of England cuts.
Yet, the latest drop in inflation and further signs of weakness in the jobs market suggest that a March rate reduction remains the most likely outcome, and this remains roughly 80% priced in by swap markets.
While the turn for the better in the performance of the UK economy could support the pound in the near-term, we suspect that this will be overshadowed by political risks, with the future of Prime Minister Starmer still shrouded in doubt.
The key by-election in Gorton and Denton on Thursday will probably be telling, with Labour looking likely to lose the seat to either the Green Party or Reform.
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