Pound Set for Largest Two-Day Gain Since December as Dollar Weakens

Impact of Trade Tensions on Currency Markets

LONDON, Jan 20 (Reuters) - The pound headed for its largest two-day rise since December on Tuesday, rallying as investors ditched the dollar in the face of mounting trade tensions between the United States and Europe over Greenland. 

Investor Reactions and Currency Shifts

U.S. President Donald Trump has threatened to impose tariffs from February 1 on imports from the UK, Denmark, Norway, Finland, France, Germany and the Netherlands unless they agree to U.S. ownership of Greenland, a Danish autonomous territory. 

Investors have responded by selling U.S. assets, including the dollar, and largely buying European currencies and gold.

Sterling has gained 0.8% in the last two days to trade around $1.348, although it has lost out against a resurgent euro, the major beneficiary of the push out of the dollar, which was last up 0.4% on Tuesday, the most since early November, to trade at 87.03 pence.

UK Labor Market Insights

UK labour market data earlier in the day painted on the surface a fairly bleak picture for the employment market, with the jobless rate holding around five-year highs in November and the number of workers on payrolls dropping by the most since November 2020.

But there were some bright spots in the report to suggest that the worst of the downturn may have passed, analysts said.

George Buckley, chief UK and euro area economist at Nomura, said the report also showed redundancies fell, while vacancies and the unemployment rate stabilised, along with the inactivity rate falling. Wage growth, a key metric for the Bank of England, also slowed to what he called "inflation-target consistent rates".

Predictions for Bank of England Rate Cuts

"This provides a helpful backdrop for the bank to cut rates again – we expect a final move to 3.50% in April, with markets pricing in the risk of earlier/more cuts," he said.

Markets are currently pricing one rate cut from the BoE by mid-year, with a roughly 60% chance of a second by December.

(Reporting by Amanda Cooper; Editing by Emelia Sithole-Matarise)