CAPITALDIGEST MARKET REVIEW, 02/03/2026

STERLING STRUGGLES AFTER UK LABOUR PARTY SUFFERS DEFEAT IN STRONGHOLD

The pound struggled to gain traction on Friday, as mounting geopolitical tensions prompted investors to back away from more typically volatile currencies, and after an election in northern England brought a resounding defeat for Prime Minister Keir Starmer’s Labour party. Sterling was heading for a second weekly decline, having lost 0.1% and on Friday stalled against both the dollar and the euro, which traded at $1.3483 and 87.55 pence, respectively.Britain’s left-wing Green Party on Friday scored a landslide victory in an area of Manchester the Labour party had dominated for almost a century, piling further pressure on Starmer to prove that he should keep his job following weeks of political turmoil and calls for him to resign. Gilts edged up modestly, pushing yields lower. Five-year bonds , which are set for their strongest monthly performance since last October, were last yielding 3.703%, down 1.4 basis points on the day, near their lowest since September 2024. The pound is highly sensitive to national politics. Doubt over Starmer’s future and whether a more left-leaning successor might be inclined to further strain the UK’s finances with more spending, for example, has acted as a drag on sterling for several weeks. “Anything that is seen weakening the position of Prime Minister Keir Starmer has hit the pound as of late, and the success of a more left-wing party (Greens) in this special election might increase the perceived possibility of a more leftish successor to Starmer should he leave office early,” ING strategist Francesco Pesole said. Prediction market Polymarket shows customers are placing a roughly 53% chance of Starmer stepping down by June, up from around 24% at the start of February. Bank of England Chief Economist Huw Pill will address an economics panel later in the day. The BoE is widely expected to cut rates in March and deliver a second cut before the end of the year, based on money markets .

FOREX US DOLLAR HEADS FOR FIRST MONTHLY GAIN SINCE OCTOBER

The U.S. dollar was headed for its first monthly gain since October on Friday, although an earlier rally on hotter-than-expected producer price data for January faded as traders squared positions for the month-end and ahead of the weekend. The U.S. currency got a boost after data showed the Producer Price Index for final demand rose 0.5% last month. Economists polled by Reuters had forecast the PPI gaining 0.3% after a previously reported 0.5% increase in December. “There’s a real deep unease in markets about inflation and growth so far in 2026,” said Adam Button, chief currency analyst at investingLive. “There’s this expectation that inflation will moderate, but it’s not showing up in the numbers.” Underneath the headline number, however, there were signs of improvement, said Chris Low, chief economist at FHN Financial. “While the PPI headline increase was alarmingly big, pressure came from trade services, a category the BLS notes is calculated in a way that does not capture true price changes in real time,” Low said in a report. “Otherwise, there is evidence of price moderation.”

STERLING SLIPS BEFORE KEY MANCHESTER VOTE; RATE OUTLOOK UNDER SCRUTINY

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 traded 0.13% lower against the dollar at $1.3541. It was also 0.1% weaker against the euro at 87.14 pence. 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.

DOLLAR HAS LOST SOME OF ITS SAFE-HAVEN STATUS, ING REPORT

February 23, 20261 The dollar has lost some, but not all, of its safe-haven value since 2024, ING said in note on Monday, adding however, that it saw no broad deterioration in global demand for the US currency. The dollar index shed almost 10% of its value last year, in its worst annual performance since 2017. Erratic U.S. trade policy, U.S. President Donald Trump’s tariff threats towards allies and attacks on the Federal Reserve have weighed on the currency. * The dollar has lost a chunk of its safe-haven value compared to 2024, when measured by calculating the three-month correlation between the dollar index and U.S. stocks and 10-year Treasuries. * Private investors, who hold more than 80% of foreign holdings of U.S. assets, remain invested. * Dollar weakness, at this stage, appears more cyclical than structural. * There are no signs yet of an acceleration in de-dollarisation, when examining the use of the dollar in global assets, liabilities, market turnover and transactions. * Fed independence is the cornerstone of global financial stability and if the U.S. central bank were to be seen cutting rates inappropriately, “a run on the dollar” could follow. Fall in dollar this year unlikely to match last year’s. ING sees euro ending year at $1.22, versus current levels around $1.18

STERLING EDGES UP, RATE DIVERGENCE AND MARKET SENTIMENT IN FOCUS

Sterling edged up against the dollar and the euro on Wednesday, with investors keeping a close eye on interest-rate divergence and market sentiment. Investors stayed on the sidelines ahead of Nvidia (NVDA.O), opens new tab results due later in the session, while an uncertain UK political backdrop and the prospect of further Bank of England rate cuts left the near-term outlook for the pound unfavourable. The pound tends to behave as a risk-sensitive currency, with a strong correlation to global equities. BoE Governor Andrew Bailey said on Tuesday that a March rate cut was possible, although he noted that services price inflation had not eased as much as hoped in recent data. The BoE turned more dovish in early February, when it held policy steady in a surprisingly tight 5–4 vote and said rates would likely fall if a decline in inflation continues. Sterling was up 0.10% versus the euro at 87.17 pence. It hit 87.52 last week, its lowest since December 19. It was up 0.18% at $1.3511 . Gilt yields are under scrutiny ahead of next week’s bond issuance plans from the UK Debt Management Office, which will follow finance minister Rachel Reeves’ updated growth and borrowing forecasts to parliament. British 10-year yields rose two basis points on Wednesday after falling to their lowest since December 2024 at 4.29% on Tuesday. Dani Stoilova, UK and Europe economist at BNP Paribas, expects the Office for Budget Responsibility to confirm indirectly that the government remains compliant with fiscal rules. Risks around the fiscal trajectory have not dissipated though, particularly given the backdrop of elevated political uncertainty, and will need to be addressed in future budgets,” she added. Prime Minister Keir Starmer, who has faced calls to step down over his appointment of Peter Mandelson as UK ambassador to the U.S., faces further scrutiny after parliament ordered the release of documents relating to the vetting of Mandelson, who was later fired for his links to the late sex offender Jeffrey Epstein.