Sterling struggles for direction before key British data

Economic Outlook for the British Pound

By Samuel Indyk

Impact of Labour Market and Inflation

LONDON, February 16 (Reuters) - The British pound was struggling for direction against the dollar and the euro on Monday before key economic data due later this week that could make or break the case for more rate cuts from the Bank of England. 

Political Stability and Its Effects

Labour market and inflation readings, on Tuesday and Wednesday respectively, will be the highlight, as the recent political instability affecting Prime Minister Keir Starmer's government has subsided for now.

Sterling was last down less than 0.1% against the dollar at $1.3647, within its recent narrow range. 

The pound was also little changed at 86.96 pence per euro.

DATA FOCUS 

The BoE kept its main interest rate on hold at 3.75% earlier this month in a tight 5-4 vote, but it said borrowing costs were likely to fall if an expected drop in inflation were to be sustained. 

Consumer prices are expected to have risen 3% from a year earlier, which would be the slowest pace of price growth since March last year. The unemployment rate is expected to hold at its highest level since December 2020.

"We are going to keep an eye on the UK data this week," said Mohamad Al-Saraf, FX and fixed income associate at Danske Bank.

"Generally speaking we are quite negative on domestic factors in the UK with regard to the pound." 

Futures markets are almost fully pricing in two quarter-point rate cuts from the BoE this year.

Conversely, the European Central Bank is seen keeping its deposit rate on hold through 2026, which could weigh on the pound against the single currency. 

POLITICAL UNCERTAINTY EASES

British PM Starmer last week pledged never to walk away from his job, brushing off challenges from within his own party to quit over his appointment of Peter Mandelson as ambassador to Washington.

Uncertainty surrounding the government has eased, but Starmer's position is still seen as vulnerable, according to ING FX strategist Francesco Pesole.

"The pound should continue to face depreciation episodes whenever Starmer’s political position deteriorates," Pesole said.

(Reporting by Samuel Indyk; Editing by David Holmes)