UK political risks weigh on pound sterling

The euro-sterling EURGBP pair holds positive ground near 0.8715 during the early European session on Thursday. Political risks in the UK drag the pound lower against the EUR, while traders will keep an eye on the speech by European Central Bank’s Christine Lagarde later in the day.

Manchester’s Gorton and Denton constituency is set to hold a special election to fill a vacant parliamentary seat on Thursday. This event is seen as a major test for Prime Minister Keir Starmer amid internal party discontent and low approval ratings.

“A heavy defeat for the ruling Labour could re-ignite speculation over the party leadership and again weigh on sterling,” said ING’s FX strategist Francesco Pesole.

Eurozone inflation eased to 1.7% YoY in January, marking a 16-month low. This report has fueled expectations that the ECB may adopt a more dovish stance, which could weigh on the EUR against the GBP.

Traders await the preliminary reading of the consumer price index (CPI) from Germany on Friday for more clues about the pace of future policy easing. Any signs of cooler inflation in Germany might exert more selling pressure on the EUR in the near term.

(Source: OANDA)