Sterling Strengthens on US Political Risk, UK Data

Sterling Strengthens on US Political Risk, UK Data

Over the past week sterling traded in a narrow but meaningful band as competing forces pushed and pulled GBP/USD around $1.344–1.346. A rise in dollar risk premium from U.S. political developments supported the pound, while softer UK labour indicators and lingering expectations of Bank of England policy easing kept gains in check. Below we break down the events that moved the pound, how positioning has shifted, and what traders should watch next.

What moved the pound this week

U.S. political shock lifts the pound

Midweek attention turned to the U.S., where an unprecedented legal threat involving the Federal Reserve chair dented the dollar’s safe-haven appeal. That repricing of dollar risk sent GBP/USD higher—sterling briefly recovered toward the mid-$1.34s—as investors stepped out of dollar assets and into alternatives such as the pound. In short, a weaker dollar acted as a tailwind for sterling even without a material change to UK fundamentals.

UK data kept gains contained

At the same time, domestic data signalled softness in the UK labour market. Cooling hiring activity and expectations around upcoming GDP and jobs releases tempered enthusiasm, reinforcing the view that the Bank of England may be reluctant to tighten policy further. This domestic caution limited sterling’s upside despite external support from dollar weakness.

Market positioning and BoE outlook

Long-dollar bets versus sterling have shrunk

Investor positioning shifted noticeably: net dollar-long bets against sterling dropped materially from about $6.6 billion in December to roughly $2.6 billion in early January. That unwind lowered a significant short-term headwind for the pound and helped sterling maintain gains once the dollar weakened.

Rate expectations: the BoE is likely to sit tight

Markets currently assign a high probability—around the high 80s percent—that the Bank of England will hold its policy rate near 3.75% at the next meeting. After the central bank’s December easing, pricing is skewed toward no further tightening in the near term. This backdrop means sterling’s moves now hinge more on incoming data and global risk signals than on fresh hawkish bets on UK rates.

Cross-asset impact and immediate outlook

A firmer pound also had knock-on effects across UK equities. The export-heavy FTSE 100 felt some pressure as a stronger sterling erodes overseas earnings in pound terms—an effect visible during this week’s trading as the index dipped modestly. For FX traders, the interplay between external dollar drivers and UK macro releases sets the near-term agenda.

Looking ahead, the next UK GDP and jobs prints are the immediate catalysts that could break the current range. If growth and employment surprise to the upside, sterling could extend gains; conversely, weaker-than-expected readings would likely reinvigorate bets for easier BoE policy and weigh on the pound. Meanwhile, any further escalation in U.S. political risk will continue to inject volatility into GBP/USD through dollar moves rather than changes in sterling-specific fundamentals.

Conclusion

This week’s price action shows a pound that is responsive to external shocks—particularly dollar weakness from U.S. political developments—while still anchored by domestic data and central-bank expectations. Traders should monitor incoming UK economic releases and U.S. political headlines closely: together they will determine whether sterling can sustain its recent resilience or re-enter a softer trend.