Sterling struggles for direction on first trading day of 2026

By Samuel Indyk

LONDON, Jan 2 (Reuters) - The British pound was little changed against both the dollar and euro on Friday, with little news to drive the currency either way as 2026 gets off to a slow start. 

Sterling was last trading at $1.3447 versus the dollar, down slightly from a three-month high of $1.3533 it hit last week. Against the euro, the pound was also little changed at 87.1 pence. 

Trading has been light around the Christmas and New Year period in Britain, with activity unlikely to pick up fully until next week. 

The direction of the currency has largely been shaped by an easing of concerns surrounding the UK budget and Bank of England policy over the last few weeks.

The BoE lowered its interest rate in a tight 5-4 vote last month, but policymakers hinted that they could slow their already gradual pace of easing in 2026. 

Money market traders are not fully pricing in another rate cut from the central bank until June. Traders are pricing in just 40 basis points of easing in 2026, implying about a 60% chance of a second quarter-point rate cut by the end of the year. 

The outlook for monetary policy will depend on how the economy evolves, with signs of a slowing labour market and stagnant economic growth in the second half of last year.

A survey on Friday showed Britain's factory activity grew at its fastest pace in 15 months in December, though that was less than previously forecast. The S&P Global Purchasing Managers' Index for manufacturing rose to 50.6, up from 50.2 in November but below an initial reading for December of 51.2.

"All told, we think the PMI paints a picture of stability within the manufacturing sector," said Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics. 

A final PMI for Britain's more dominant services sector is due to be released on Tuesday next week. 

(Reporting by Samuel Indyk; editing by Mark Heinrich)