Pound Slides as Rate-Cut Expectations and Political Risks Weigh
The British pound weakened sharply as rising economic and political uncertainty in the UK weighed on investor sentiment. Markets are increasingly pricing in deeper interest rate cuts by the Bank of England (BoE). On another, while political risks intensified following renewed scrutiny surrounding the Jeffrey Epstein files.
Sterling fell more than 0.6% against both the US dollar and the euro on Thursday (February 5). While the GBP/USD pair attempted a modest rebound at the start of the New York session, selling pressure remained firmly in place.
The currency's decline reflects a shift in expectations for UK monetary policy alongside mounting domestic political concerns linked to the resurfacing of Epstein-related documents.
BoE Signals a Shift Toward Policy Easing
The Bank of England left its benchmark interest rate unchanged at its latest policy meeting, in line with market expectations. However, policymakers signalled that the trajectory of monetary policy is increasingly tilted toward easing.
In its statement, the BoE noted that inflationary pressures are expected to continue easing as domestic demand and labour market conditions soften. Inflation is projected to return to the 2% target by April, reducing the need to maintain restrictive interest rate settings for an extended period.
The central bank also acknowledged that the risk of persistently high inflation has diminished, while a slowing economy could exert further downward pressure on prices through weaker demand. Against this backdrop, the BoE indicated that additional rate cuts are likely.
In line with this, the BoE has revised down several economic projections. Economic growth in the UK for 2026 is now estimated to reach only 0.9%, lower than the previous projection of 1.2%. Meanwhile, the unemployment rate is expected to continue rising through 2028.
This change in the BoE's stance has triggered aggressive adjustments in market expectations. Money market pricing now fully reflects cumulative rate cuts of around 50 basis points by year-end, up from the previous estimate of around 35 basis points. Some analysts even predict that rate cuts could begin in March and continue in June 2026, especially if UK economic data continues to disappoint.
Epstein Files Shake UK Politics
Beyond monetary policy, sterling has also come under pressure from heightened political uncertainty at home. Prime Minister Keir Starmer confirmed in parliament that he was aware of the personal relationship between Peter Mandelson and Jeffrey Epstein before appointing Mandelson as the UK's ambassador to the United States last year.
This acknowledgment sparked a wave of criticism and political speculation. Data from Polymarket shows a 63% chance that Starmer could potentially be ousted from his position before December 2026.
Pressure on Starmer's leadership has intensified amid declining support for the Labour Party in opinion polls. Analysts warn that any change in leadership could introduce shifts in the UK's economic policy priorities, adding another layer of uncertainty for investors.
The Epstein case has resurfaced after the US Department of Justice gradually released documents related to the network and relationships of the human trafficking perpetrator. These documents have sparked widespread speculation regarding the involvement of influential figures worldwide.
In Mandelson's context, the allegations are considered more serious as several pieces of evidence indicate the flow of funds from Epstein to Mandelson and his partner. Allegations of providing confidential government information to Epstein during 2009-2010 have emerged too, further unsettling the UK political landscape and compounding downward pressure on the pound.