Sterling on the back foot
Sterling was on the back foot yesterday, shedding around half a percent against both the dollar and the euro (more than reversing Wednesday’s gains) amid a ‘risk off’ mood in markets and ahead of the result of the UK by-election in Gorton and Denton in Greater Manchester. Labour lost the latter convincingly, coming in a distant third behind the Greens, who took the seat, and Reform in second place, with the result likely to keep the pressure on PM and Labour leader Starmer ahead of local elections in May. The pound is trading at a new 2026 low against the euro of about £0.8760 this morning, and is back below $1.35 against the dollar. The euro is not much changed against the US currency versus yesterday morning’s levels, trading at around $1.1815, within the relatively narrow range of circa $1.1765 to $1.1835 that has prevailed this week to date.
US equities reversed course yesterday, giving up most of Wednesday’s gains, with the Nasdaq leading the way (shedding more than 1%), while European stocks were largely unchanged on the day. Government bonds rallied with US and UK yields falling by 4-5bps across the curve and German yields around 2-3bps lower. The benchmark US 10-year yield is now back at 4%, its lowest level since late November last year.
Consumer confidence in the UK fell back in February according to the GfK measure, reversing its post-November budget gains. GfK notes that “unemployment has now reached its highest level in nearly five years, and this is increasing concerns about job security, particularly given the backdrop of weak wage growth.” Separately, business confidence was unchanged this month, after declining sharply in January, according to the Lloyd’s Business Barometer.
In remarks at the European Parliament yesterday, ECB President Christine Lagarde said economic activity in the Euro area “is expected to be supported by a resilient labour market, as well as investment in defence, infrastructure and digital technologies, while at the same time, the trade environment remains challenging owing to higher tariffs, a stronger euro and a persistently volatile global policy environment”. She notes that “wage growth remains elevated but has eased gradually and is expected to continue to moderate to around 3% in the medium term,” which in turn will help inflation “to stabilise at our 2% target.”
The latest Euro area economic data were somewhat underwhelming. The European Commission’s Economic Sentiment Indicator fell in February (albeit following a strong increase in January), largely reflecting a decline in sentiment in the services sector, and remained below its long-term average. Meanwhile, credit growth in the zone remained relatively modest in January, with the year-on-year increase in lending to households (dominated by lending for house purchase) unchanged at 3% but lending growth to non-financial corporations easing for a second month in a row, to 2.8% from 3% in December and 3.1% in November.
It’s a relatively quiet end to the week in terms of economic data. Producers prices (for January) and construction spending (for December) are scheduled in the US, while the ECB publishes its latest survey of short (1-year ahead) and medium (3-year ahead) inflation expectations.