The pound traded little changed near $1.37 on Monday as attention concentrated on a Bank of England announcement due later this week. Sterling was last quoted up less than 0.1% against the dollar at $1.3696, after peaking at $1.3867 last week - its highest level since September 2021 - before slipping on Friday when the U.S. dollar firmed following the nomination of Kevin Warsh to lead the Federal Reserve.
Against the euro, the pound showed minimal movement, trading at 86.61 pence.
BoE decision in focus
Market participants are watching the Bank of England closely ahead of Thursday's policy announcement. In a recent Reuters poll, all but two economists surveyed expected the central bank to keep its benchmark interest rate at 3.75% when it meets later this week. The expectation for a hold is reinforced by a combination of resilient data since the bank's last meeting and the fact that U.K. inflation remains the highest among Group of Seven industrialised peers, conditions that suggest the BoE can afford to delay rate cuts for now.
Policy meetings in recent months produced deep divisions among rate-setters, but analysts say this decision appears likely to be less contested. "This week we could, for once, have a boring Bank of England meeting," said Mohamad Al-Saraf, FX and fixed income associate at Danske Bank. He added that he expects the central bank to keep the interest rate on hold and does not anticipate a major market reaction or significant implications for the pound.
Manufacturing shows signs of pick-up
Adding to the backdrop for policymakers, a closely watched gauge of Britain’s manufacturing health, the S&P Global Manufacturing Purchasing Managers' Index, rose to its strongest level since August 2024 in the most recent month, according to a survey released on Monday. The improvement adds to evidence of a rebound in activity after a subdued end to 2025.
"We take encouragement from how stable the PMI has been in recent months, with the output index holding above 51.0 for three of the past four months," Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said in an emailed note. He noted that a broad improvement across the PMI's sub-indices in January provides further reason to hope that the steady momentum observed over recent months can be sustained.
Market expectations and outlook
The latest data and commentary have had only a modest effect on expectations for Bank of England policy. Money market traders are pricing in a single quarter-point rate cut in 2026, with about a 50% chance of a second cut, indicating that markets see only gradual easing over the coming year.
Meanwhile, the pound's recent retreat from last week's multi-year high came as the U.S. currency strengthened following the announcement of a nomination to head the Federal Reserve, underscoring how U.S. monetary developments remain a factor for sterling’s shorter-term moves.
With the BoE meeting approaching, market participants and economists will be parsing the central bank's statement and any associated commentary for signals on timing for future rate changes, while also monitoring domestic activity indicators such as manufacturing for clues on the economy's durability.