Sterling limps to worst week in two months after bruising few days

Impact of Political Events on Currency

By Amanda Cooper

Market Reactions to Political Crisis

LONDON, Feb 13 (Reuters) - The pound headed for its biggest weekly loss in over two months against the euro on Friday after a turbulent week in British politics and in financial markets, which have been gripped by worries about the long-term impact of artificial intelligence.

Economic Data and Investor Sentiment

The euro, which has flat-lined against the dollar this week, is heading for a gain of 0.3% against the pound, the most since early December. It was last down 0.12% at 87.05 pence. The pound was steady at $1.362, set for a flat performance against the U.S. currency for the week.

GDP Performance Overview

The pound, UK bonds and stocks all suffered earlier in the week when a political crisis sparked by the Epstein affair seemed to threaten Prime Minister Keir Starmer's hold on power.

Options Trading Insights

However, the selling pressure subsided after the cabinet rallied behind Starmer and he pledged never to walk away from his position.

In a further setback for investor confidence, UK gross domestic product data on Thursday showed that the economy almost ground to a halt in the final three months of 2025. 

This did not shift market expectations that the Bank of England will deliver no more than two rate cuts this year, given policymakers' concern about persistent inflationary pressures. 

"Q4 UK GDP disappointed, with the economy growing just 0.1% quarter-on-quarter in the final three months of last year, unchanged from the pace seen in Q3," Pepperstone senior research strategist Michael Brown said.

"Not only is this meagre pace not worth celebrating at all – despite some in Westminster popping the champagne post-release – it must also be set in the context of an economy that has grown at a quarterly clip over 0.5% in just 3 of the last 15 quarters, but also one where risks to the outlook continue to tilt firmly to the downside," he said.

Options traders this week have reached their most bullish view on the euro against the pound since September.

Risk reversals, which reflect the difference between the cost of an option to buy the euro against the pound and the cost to sell it, reached a peak of 78.8 basis points on Tuesday, the most since late September. The higher this number, the more positive traders are towards the euro, and vice versa.

Three-month risk reversals for euro/sterling were last at 63 bps, up four bps in the last week, according to LSEG data.

(Reporting by Amanda Cooper; Editing by Gareth Jones)