The British pound edged lower against the strengthening U.S. dollar on Wednesday while remaining steady against the euro. This comes a day after the UK government pledged to ramp
up military spending.
The U.S. dollar gained ground, rebounding from an 11-week low, as Treasury yields recovered from recent declines.
On Tuesday, UK Prime Minister Keir Starmer announced plans to raise annual defense spending to 2.5% of GDP by 2027, with an eventual target of 3%—a level last seen post-Cold War. The move signals to U.S. President Donald Trump that Britain is committed to bolstering European security.
Sterling slipped 0.1% to $1.2653, following a high of $1.2626 on Monday, the strongest level since December 18.
"We believe sterling may start underperforming in March," said Chris Turner, head of forex strategy at ING.
Analysts suggest that the Bank of England (BoE) may lean toward further rate cuts in response to the central bank’s recent dovish stance.
BoE policymakers remain divided on the pace of rate reductions. While they agreed on a “gradual” approach, Monetary Policy Committee (MPC) member Swati Dhingra noted on Monday that there was no consensus on the exact timeline.
Dhingra was among two MPC members who voted for a half-point rate cut on February 6, while the majority opted for a more modest quarter-point reduction to 4.5%.
Investors are closely monitoring U.S. trade policies, with expectations that new tariffs could impact the European economy more than the UK. However, protectionist measures are expected to weigh on all European currencies.
The euro slipped 0.05% to 82.92 pence, having hit a low of 82.63 pence on Friday, its weakest level since January 2.
Markets anticipate the BoE to cut rates by 57 basis points in 2025, while the European Central Bank (ECB) is expected to ease by 80 basis points.
However, recent ECB commentary has introduced uncertainty about future monetary policy. ECB board member Isabel Schnabel recently questioned whether the current 2.75% rate still restricts the eurozone economy. This comes after her remarks last week suggesting the ECB should begin discussing when to halt rate cuts.
