GBP: Political upset unsettles sterling

Sterling is under pressure after Labour lost the Gorton and Denton by election, with the Green Party securing 40.7% of the vote in its first Westminster by election win. Reform UK placed second on 28.7%, while Labour fell to third with 25.4%, overturning a previously safe seat. The result has revived scrutiny of Labour’s leadership and dented confidence in the pound.

GBP initially edged higher on the view that a Green victory was less market-sensitive than a Reform UK win, but that move quickly faded. Sterling is the weakest performer in the G10 this morning. GBP/USD briefly retested its 200 day moving average near 1.3447, a level that has provided support since December, before recovering back above 1.35 on broader dollar softness. GBP/EUR posted one of its largest daily declines of the year and is tracking a fourth consecutive weekly fall, with price action biased towards further downside.

The political implications are now in focus. While no immediate policy shift is expected and Starmer is likely to remain in place for now, May’s local elections represent a clear risk event. A further deterioration in support could intensify internal party pressure.

For markets, the by election result raises the probability of a less predictable fiscal path at a time when UK public finances leave little room for manoeuvre. Any shift in tone on tax or spending would likely lift gilt yields through a higher risk premium and weigh on sterling if investors anticipate greater issuance or reduced fiscal clarity.

USD: Labour market resilience supports quiet dollar strength

Latest US data point to a labour market that has stabilised. Initial Jobless Claims for the week ending 21 February printed at 212k, below expectations of 216k. Continuing Claims fell to 1,833k, undershooting both the prior reading and consensus, and remaining close to multi year lows. The 13 week moving average continues to track below pre pandemic norms, reinforcing the impression of underlying resilience.

That said, the recovery remains uneven. The Kansas City Fed Manufacturing Activity index rose to 5, beating forecasts of 2, but goods producers face renewed uncertainty following the Supreme Court ruling on tariffs. At the same time, rapid adoption of AI technologies is beginning to reshape parts of the services sector, creating a divergence in sentiment across industries.

The dollar has stayed well supported through the week, albeit within tight ranges and subdued volatility. This steady bid reflects a cautious tone in equities. A sharp decline in chipmakers, including a 4% drop in Nvidia after earnings failed to extend AI enthusiasm, pushed the Nasdaq 100 down 1.6% and encouraged demand for bonds and the dollar. Added geopolitical unease around US Iran nuclear discussions has reinforced the greenback’s haven appeal, particularly as investors reassess the durability of technology sector momentum.

EUR: Range trade persists as data underwhelm

EUR/USD edged lower, reversing part of Wednesday’s move that briefly lifted the pair above 1.18. The cross remains above its 50 day moving average, but the downward sloping 21 day continues to limit sustained gains beyond 1.18. With the 21 day at 1.1831 and the 50 day at 1.1771, price action remains compressed within a narrow band.

Stronger US labour market signals, including another below estimate jobless claims print, have reinforced expectations that the Federal Reserve will keep its focus firmly on inflation, which remains above target. Any data that supports that stance is likely to maintain downward pressure on EUR/USD.

On the domestic side, European Commission sentiment indicators disappointed across economic, industrial and services components, while consumer confidence met expectations. Even so, broader sentiment has improved steadily since the second half of 2025, supported by expectations of increased public investment into 2026.

With no major catalysts on today’s calendar, range trading conditions are likely to persist in the near term.

Looking ahead

• UK local elections in May as a potential trigger for renewed political risk premium in sterling

• Further US labour market and inflation releases shaping expectations for Fed policy

• Developments in US trade policy and AI sector earnings as drivers of equity volatility

• Euro area activity data for confirmation of improving sentiment into 2026