Sterling recovers some BoE-led losses, politics loom large

By Amanda Cooper

LONDON, Feb 6 (Reuters) - The pound rose on Friday, recovering some of the previous day's steep slide that followed a surprisingly tight vote from the Bank of England to leave rates unchanged and its signal that it could cut if inflation continues to cool.

Sterling GBP= rose 0.4% to $1.3581 by mid-morning in London, partially recovering from Thursday's near-1% drop to 10-day lows.

The pound strengthened against the euro EURGBP=, which dropped 0.2% to 86.88 pence, after having staged its biggest one-day rally against sterling since last August the previous day.

The European Central Bank also met to set interest rates on Thursday, leaving them unchanged. But policymakers indicated they were in no hurry to lower borrowing costs, even as inflation runs below their 2% target.

On top of the shifting outlook for interest rates, sterling traders, who are sticking with their view that the BoE will likely cut rates twice this year, are having to contend with a tricky political backdrop this week.

Prime Minister Keir Starmer is under huge pressure, including from lawmakers in his own Labour Party, over the decision to make Peter Mandelson Britain's ambassador to Washington in December 2024, when his ties to the late U.S. sex offender Jeffrey Epstein were already known.

Concern about the vulnerability of his position drove a rise in gilt yields earlier this week that reversed after the BoE decision.

"The market struggles to fully price two 25-basis point cuts this year – probably because of politics. Any leadership challenge to PM Keir Starmer and the presumed leftward shift in policy setting would leave the gilt market vulnerable and could delay a BoE easing cycle. Notably, 30-year UK gilt yields ended the day higher yesterday, despite the dovish BoE communication," ING strategist Chris Turner said.

"We see plenty of room for sterling to take the strain here and would look for EUR/GBP to now find support at 0.8670/80. Our bias over the next month is towards 0.88 as political pressure remains on Starmer and data slowly adds to the case for a March BoE rate cut," he said.