Sterling drops vs euro and dollar after weak economic data

Sterling Drops Against Euro and Dollar After UK Data Fuels Inflation Risk

Market Reactions and Economic Outlook

By Stefano Rebaudo

March 13 (Reuters) - The pound headed for a fourth daily loss against the dollar on Friday after weak UK economic data, while concerns about the economic impact of the conflict in the Middle East drove investors into the greenback.

UK Economic Data and Inflation Concerns

Britain's economy stagnated unexpectedly in January, data showed on Friday, while long-term inflation expectations stayed stubbornly high. 

Economists said the pace of demand growth shortly before the Iran war began is an important input into the debate on how the Bank of England will react to the resulting energy price shock.

The pound was last down 0.51% on the day against the dollar at $1.3273.

Bank of England Policy Outlook

"We think that the renewed risk of persistent inflation will lead the Monetary Policy Committee (MPC) to vote 8-1 in favour of a hold rather than a cut next Thursday," said Andrew Wishart, an economist at Berenberg.

"However, once energy prices fall back, or it becomes clear that demand is soft enough for underlying disinflation to continue despite higher energy prices, we expect the BoE to resume interest rate cuts," he added.

Currency and Bond Market Movements

The euro rose 0.13% to 86.37 pence after hitting 86.18 pence on Thursday, its lowest since early February.

Expectations for European Central Bank

"Swap markets are now largely pricing in a 25 basis-point hike by the end of 2026," said Matthew Ryan, head of market strategy at global financial services firm Ebury.

"We think that this is excessive given weak domestic demand and a cooling jobs market, not to mention that it is unclear at this stage whether the supply-side shock will be enough to de-anchor inflation expectations," he added.

Markets are betting on the European Central Bank raising rates at least once in 2026.

UK Government Bond Yields

British 2-year government bond yields were last up 0.5 basis points at 4.11%, after jumping more than 50 basis points since March 2 as markets priced in a more hawkish Bank of England.

"The next rate cut, we think, will come in the second quarter this year, when the MPC sees more evidence of falling core inflation alongside a likely resolution of the Iran conflict," said Sanjay Raja, chief UK economist at Deutsche Bank.

(reporting by Stefano Rebaudo; Editing by Jan Harvey)