Sterling Declines Against Euro and Dollar Following Weak UK Economic Data
By Stefano Rebaudo, March 13, 2026
The British pound edged lower against both the US dollar and the euro on Friday, extending its losses to a fourth consecutive day after disappointing economic reports and rising geopolitical concerns. The currency’s decline reflects growing investor unease amid stagnant domestic growth and heightened uncertainty linked to the ongoing conflict in the Middle East.
UK Economy Shows Unexpected Stagnation
Official data released on Friday revealed that the UK economy unexpectedly stagnated in January, signaling a sluggish start to the year. At the same time, long-term inflation expectations remained persistently high, complicating the outlook for monetary policy.
Economists noted that the pace of demand growth just prior to the outbreak of the Iran conflict would be a critical factor influencing the Bank of England’s future decisions, particularly as the country grapples with an energy price shock stemming from geopolitical tensions.
Market Reaction: Pound Weakens Against Major Currencies
In currency markets, the pound was last trading down 0.51% against the US dollar at $1.3273. The euro strengthened modestly by 0.13% to 86.37 pence, rebounding slightly after hitting a near two-month low of 86.18 pence on Thursday.
Andrew Wishart, economist at Berenberg, emphasized that the risk of persistent inflation would likely persuade the Bank of England’s Monetary Policy Committee (MPC) to favor maintaining current interest rates next week. "We think the MPC will vote 8-1 in favor of a hold rather than a cut next Thursday," he said. However, Wishart added that once energy prices ease or it becomes evident that demand has softened enough to encourage underlying disinflation, the BoE would probably resume interest rate reductions.
Supporting this view, British two-year government bond yields crept up 0.5 basis points to 4.11% on Friday, following a significant jump of more than 50 basis points since early March as markets priced in a more hawkish stance from the Bank of England.
Geopolitical Uncertainty Fuels Demand for the US Dollar
The ongoing conflict in the Middle East has increased investor appetite for the US dollar as a safe-haven asset. Economic uncertainty amplified by these geopolitical risks has pressured the pound, overshadowing the currency’s fundamentals.
Matthew Ryan, head of market strategy at financial services firm Ebury, noted that swap markets are largely pricing in a 25 basis-point rate hike by the end of 2026. However, Ryan considers this view excessive given the UK’s weak domestic demand and signs of a cooling labor market. The extent to which supply-side shocks will de-anchor inflation expectations remains uncertain and will be closely monitored by policymakers.
Outlook for UK Monetary Policy
Looking ahead, Sanjay Raja, chief UK economist at Deutsche Bank, anticipates that the Bank of England will likely implement its next rate cut in the second quarter of 2026. He explained that this would coincide with clearer evidence of declining core inflation and a probable resolution to the Iran conflict easing energy price pressures.
European Central Bank Rate Expectations
Meanwhile, markets continue to bet on at least one European Central Bank rate increase in 2026, reflecting different inflation dynamics and economic conditions across the continent. The euro’s moderate gains against sterling partly reflect these diverging monetary policy expectations.
As the Bank of England prepares for its upcoming policy decision, investors will remain attentive to further economic data and geopolitical developments, which will be pivotal in shaping the trajectory of the British pound in the months ahead.
Reporting by Stefano Rebaudo; Editing by Jan Harvey
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