Finance
Sterling rallies vs dollar, flat against euro as risk premium unwinds
Published by Global Banking and Finance Review
Posted on January 12, 2026
Pound Gains Against Dollar, Steady Against Euro as Risk Premium Eases
Currency Movements and Economic Factors
By Stefano Rebaudo
Impact of Political Developments
Jan 12 (Reuters) - Sterling rallied against the U.S. dollar on Monday, alongside the euro and the Swiss franc, after the Trump administration threatened Federal Reserve Chair Jerome Powell with a criminal indictment.
Economic Data and Forecasts
The greenback fell sharply as the unprecedented move raised concerns about the U.S. currency's safe-haven status.
Market Reactions and Analyst Insights
The pound rose 0.43% to $1.3460, recovering after hitting $1.3392 earlier in the session, a fresh three-week low.
Analysts argued that a reduction in UK fiscal and political risks has supported the British currency since finance minister Rachel Reeves presented the budget in November.
The euro was roughly unchanged at 86.78 pence. The single currency marked its fourth consecutive weekly decline last week. However, it has picked up against the pound since hitting 86.44 pence last Tuesday, its lowest since mid-September.
“Narrowing yield differentials between the UK and euro zone should continue to encourage a weaker pound against the euro, lifting the single currency closer to the 0.90 level in 2026,” said Derek Halpenny, head of research global markets EMEA at MUFG.
“The relationship has broken down recently as the euro/sterling has corrected lower after the Autumn Statement, but we are not convinced this will be sustained,” he added, referring to the UK annual budget in November.
Barclays turned neutral on the pound in the near term as the risk premium has almost fully unwound, it said in its weekly strategy report on Friday.
Euro/sterling was fairly close to rate differential-consistent levels, the bank argued.
Investors are now looking for clearer signals on the UK economy, with gross domestic product data due on Thursday and jobs figures next week, both seen as key to gauging the Bank of England’s policy path.
Analysts also cited political developments and a possible UK leadership contest, which could raise concerns about a potential shift to the left, creating renewed unease over fiscal risks.
Prime Minister Keir Starmer said he would stay the course when recently asked if there were any circumstances in which he could stand down if a poor showing in local elections in May prompts a challenge to his leadership.
(Reporting by Stefano Rebaudo; Editing by Susan Fenton)
Frequently Asked Questions about Sterling rallies vs dollar, flat against euro as risk premium unwinds
1What is the pound?
The pound, also known as the British pound sterling, is the official currency of the United Kingdom and its territories. It is one of the oldest currencies still in use today.
2What is a currency's safe-haven status?
A currency's safe-haven status refers to its perceived reliability and stability during times of economic uncertainty. Investors often flock to these currencies to protect their assets.
3What is monetary policy?
Monetary policy is the process by which a country's central bank manages the money supply and interest rates to achieve macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.
