Pound Holds Steady Despite UK Economic Contraction: Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

The GBP has demonstrated robust performance in early 2025 but has recently stabilised against other major currencies. The pound seemed relatively unaffected by last week’s GDP growth data, which came in below expectation, revealing the UK economy contracted unexpectedly in January. Estimates report the economy shrunk by 0.1%, 0.2% below the 0.1% growth forecast by markets.

Sterling is being impacted by US dollar weakness, with any downward pressure on the pound being outweighed by the broad decline of the dollar.

There is potential for more volatility this week amid the Bank of England’s meeting on Thursday 20 March, as interest rates can influence short-term GBP strength. The market is expecting the central bank to hold interest rates at 4.5%.

This follows the recent uptick in inflation in the UK. Markets will be closely monitoring the accompanying commentary from policymakers for any indications regarding future rate adjustments, as expectations have changed considerably since the start of the year, with more cuts forecast down the road. The meeting could be pivotal in determining the pound’s trajectory in the forthcoming weeks.

On Thursday, we will also see the release of the UK’s latest employment data, which may have significant implications for the GBP depending on the results. Unemployment is expected to show no change from January’s 4.4% and wage growth is expected to drop slightly to 5.8% from last month’s reading of 6%.

The UK’s elevated wage growth seemed to deter the Bank of England from backing a 50 bp cut in February, and its monetary policy committee is scheduled to meet several hours after employment data is released for March.

EUR

The euro has gained ground recently, contrary to many traders’ forecasts for this year. President Trump’s trade tariff policy has been exerting downward pressure on the euro since the US election in November. However, anticipated substantial defence spending has aided the euro in recovering its lost value.

Markets will be closely watching the German defence spending vote, which could impact the euro depending on the outcome. This vote has been a significant driver of euro strength this month, and any failure could result in a swift reversal.

In terms of economic data releases, the most notable this week is the German ZEW Economic Sentiment. This is a measure of the German assessment of the current economic situation, which fell for the last five months of 2024, but has been on an upward trajectory since the start of the year.

Lead photo credit : Shutterstock