The pound edged higher against the U.S. dollar for the fourth straight day on Tuesday, supported by stronger-than-expected inflation data and broader dollar weakness. Sterling last traded at $1.3696—up 0.12% and near a four-month high. Against the euro, it slipped slightly to 86.72 pence.
This recent strength in the pound sterling outlook stems partly from fresh data showing UK retail inflation jumped sharply in January. According to the British Retail Consortium (BRC), prices at major retailers rose at their fastest pace in nearly two years. “Any suggestion that inflation has peaked is simply not borne out by these figures,” said BRC Chief Executive Helen Dickinson.
The rebound in inflation could complicate the Bank of England’s next move. While markets still expect the central bank to hold rates steady at its upcoming meeting, traders now see only one rate cut by mid-year—and possibly a second by December. Stronger price pressures may delay or reduce those cuts.
At the same time, the U.S. dollar has weakened due to global uncertainties. Geopolitical risks and renewed tariff fears have revived the “sell America” trade. Traders are also watching for possible coordinated currency intervention by U.S. and Japanese authorities—adding to dollar pressure.
Yet, despite the pound’s recent gains, UK political risks are mounting. The Labour Party is blocking Manchester Mayor Andy Burnham from returning to Parliament. Many view Burnham as a potential rival to Prime Minister Keir Starmer, whose leadership faces growing internal challenges. This emerging rift has sparked talk of a “Labour civil war.”
Nick Rees, Head of Macro Research at Monex, warns that markets may be overlooking these domestic dangers. “Sterling right now is benefiting from the distractions elsewhere in markets,” he said. “But traders should focus on the UK political situation—it’s really quite volatile.”
He added that political instability threatens confidence, economic stability, and sound policymaking. “What looks like an emerging Labour civil war is not great for any of those,” Rees noted. He also pointed out that the UK’s fiscal position remains fragile.
For now, global factors are masking these local concerns. But Rees believes that once attention shifts back to Britain, the pound sterling outlook could turn bearish. “You add all that up,” he said, “and we see downside risks to sterling as soon as markets start paying attention.”
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