Sterling slips before key Manchester vote; rate outlook under scrutiny

By Niket Nishant

Feb 26 (Reuters) - The British pound edged lower on Thursday ahead of a local election in Manchester that could offer an early read on Prime Minister Keir Starmer's political standing.

The currency GBP=D3 traded 0.13% lower against the dollar at $1.3541. It was also 0.1% weaker against the euro at 87.14 pence.

Political uncertainty has been a major drag on sentiment, with the vote in Gorton and Denton, in northwestern England's Greater Manchester, marking the latest challenge for Starmer.

The prime minister's judgment came into question over several policy U-turns and the appointment of Labour veteran Peter Mandelson as ambassador to Washington.

Mandelson was sacked after a trove of emails showed his links to the late sex offender Jeffrey Epstein. He has denied any wrongdoing.

"A defeat for the Labour Party could increase pressure on Keir Starmer's position as prime minister and would add to concerns over the Party's sliding popularity ahead of the local elections in May," analysts at MUFG wrote.

RATE POLICY IN FOCUS

Sterling has swung this week as investors assessed the Bank of England's rate path.

At a session of the parliamentary Treasury Committee, BoE Governor Andrew Bailey said a rate cut in March was a "genuinely open question," pointing to services inflation as a key concern.

On the other hand, sluggish GDP growth and higher unemployment in the fourth quarter, combined with lower inflation in January, have reinforced expectations that the BoE may need to reduce rates soon.

The BoE left policy rates unchanged in a narrow 5–4 split at its meeting earlier this month. Bailey voted to hold.

Gilt yields are also drawing attention ahead of next week's bond issuance plans from the UK Debt Management Office.

British 10-year yields GB10YT=RR dipped one basis point to 4.31% after falling to their lowest since December 2024 earlier this week.

Finance minister Rachel Reeves is due to announce new economic forecasts in an annual budget update speech next week.

"Don't expect a blockbuster — but there are several areas to watch. Markets will be particularly sensitive to the inflation narrative," said Rathbones' financial planning divisional lead Rebecca Williams.