Key Takeaways
- The UK pound is stable in light trading post-holidays, with little news to drive the currency either way
- The Bank of England’s policy will dictate the pound’s direction in 2026, with money market traders pricing in a 60% chance of a second quarter-point rate cut by the end of the year
- Britain’s factory activity grew at its fastest pace in 15 months in December, but the outlook for monetary policy will depend on how the economy evolves
- The UK’s labour market is slowing, and economic growth was stagnant in the second half of last year
- The direction of the currency has been shaped by an easing of concerns surrounding the UK budget and Bank of England policy over the last few weeks
Introduction to the UK Pound’s Stability
The UK pound has started the new year on a stable note, with little change against both the dollar and euro. As of the latest trading session, the pound was trading at $1.3447 versus the dollar, down slightly from a three-month high of $1.3533 it hit last week. Against the euro, the pound was also little changed at 87.1 pence. This stability can be attributed to the lack of significant news or events driving the currency either way, with trading activity expected to pick up fully only next week. The Christmas and New Year period has seen light trading in Britain, and the market is waiting for more substantial developments to influence the pound’s direction.
Bank of England Policy and Its Impact
The Bank of England’s policy will play a crucial role in dictating the pound’s direction in 2026. The central bank lowered its interest rate in a tight 5-4 vote last month, but policymakers hinted that they could slow their already gradual pace of easing in 2026. Money market traders are not fully pricing in another rate cut from the central bank until June, with only 40 basis points of easing priced in for 2026. This implies about a 60% chance of a second quarter-point rate cut by the end of the year. The outlook for monetary policy will depend on how the economy evolves, with signs of a slowing labour market and stagnant economic growth in the second half of last year.
Factory Activity and Economic Growth
A survey released on Friday showed that Britain’s factory activity grew at its fastest pace in 15 months in December. The S&P Global Purchasing Managers’ Index for manufacturing rose to 50.6, up from 50.2 in November, but below an initial reading for December of 51.2. According to Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, "All told, we think the PMI paints a picture of stability within the manufacturing sector." However, the outlook for economic growth remains uncertain, with the labour market slowing and stagnant growth in the second half of last year. A final PMI for Britain’s more dominant services sector is due to be released on Tuesday next week, which will provide further insights into the state of the economy.
Trading Activity and Market Expectations
Trading activity has been light around the Christmas and New Year period in Britain, with activity unlikely to pick up fully until next week. The direction of the currency has largely been shaped by an easing of concerns surrounding the UK budget and Bank of England policy over the last few weeks. The market is waiting for more substantial developments to influence the pound’s direction, with the Bank of England’s policy and economic data releases expected to play a crucial role in shaping the currency’s trajectory in 2026. As the market waits for more news, the pound is expected to remain stable, with any significant movements likely to be driven by changes in market expectations or unexpected events.
Conclusion and Future Outlook
In conclusion, the UK pound has started the new year on a stable note, with the Bank of England’s policy and economic data releases expected to play a crucial role in shaping the currency’s trajectory in 2026. The market is waiting for more substantial developments to influence the pound’s direction, with the outlook for monetary policy dependent on how the economy evolves. As the market navigates the uncertain economic landscape, the pound’s stability is likely to be tested, with any significant changes in market expectations or unexpected events potentially driving the currency’s direction. With the UK’s labour market slowing and economic growth stagnant, the Bank of England’s policy decisions will be closely watched, and their impact on the pound will be significant.
