Data showed that economic recovery in the UK is fragile, cutting the odds of further monetary easing in the short term
Figures released last week painted a picture of fragile economic recovery in the UK, with GDP increasing by just 0.1% in the final quarter of 2025. On an annual basis, GDP rose by 1%, the slowest expansion since the middle of 2024.
Sterling remained in something of a holding pattern, with little movement against either the dollar or euro. Nevertheless, the weaker-than-expected economic performance means further monetary easing is now more likely in the short term.
The pound has strengthened over 8% in the last 12 months against the dollar, but remains over 4% down against the euro.
The euro makes modest gains
In a quiet week, the euro edged upwards against the dollar, remaining close to a four-year high. The euro is buoyed by low inflation and settled monetary policy, with no further rate reduction on the cards in the next few months. Interest rates in the eurozone are stable at 2.15%, well below the 3.75% rates in the US and UK.
That said, investors are beginning to price in further monetary easing in the US after figures last week showed inflation slowing to 2.4% – a bigger fall than expected – and a resilient labour market. This positive combination may tempt the Federal Reserve (Fed) into a cut in the next two or three months.
The week ahead:
The major data releases in the US this week include quarterly GDP (Friday), balance of trade and industrial production (both Wednesday). In the UK, inflation (Wednesday) and labour market statistics (Tuesday) will be keenly watched for indications that a rate cut might be on the cards. In the eurozone, investors will be focusing on industrial production (Monday) and consumer confidence, alongside flash PMI surveys (Purchasing Manager Index – snapshots of economic confidence) for manufacturing and services (Friday).
