5 January 2026: The Pound Remains Steady Amid Mixed Signals

It appears that the Prime Minister is preparing to yet again bend to the wishes of his backbench MPs by gradually unpicking Brexit. In an interview with the BBC yesterday, Sir Keir Starmer said that the UK should “go further” in strengthening post-Brexit ties with Brussels following a trade deal agreed earlier this year.

However, he appeared to pour cold water on suggestions that the UK should re-join a customs union with the bloc after his Health Secretary Wes Streeting said the arrangement had “enormous economic benefits”.

Conservative leader Kemi Badenoch accused the Prime Minister of “surrendering our freedom” to appease his backbenchers by trying to “undo” Brexit.

Starmer went on to say, “I do understand why people are saying, ‘wouldn’t it be better to go to the customs union?’ I actually think that now we’ve done deals with the US, which are in our national interest, now we’ve done deals with India, which are in our national interest, we are better looking to the single market rather than the customs union for our further alignment.”

Artificial intelligence will add billions to the UK economy within the next six years as machines boost productivity, accountancy firm PwC has predicted.

Its economists estimated that AI would add around £2 billion in productivity gains to GDP this year, increasing to £7 billion by 2029 and £23 billion by 2032.

PwC predicted AI would contribute around 10% of the estimated 1.2% rise in GDP this year, but by 2032, this will be 43%

The firm's UK chief economist said the British economy was likely to see a 'much stronger focus' on domestic growth, rather than relying on international trade. He added that this could include driving 'the take-up of AI across the economy,' particularly amid 'little to no growth' in the population this year due to a slowdown in migration and birth rates.

'This means reducing economic inactivity and increasing productivity will become much more important levers to grow the economy,' PwC said. Expectations that AI will boost growth may come as a relief to ministers trying to avoid stagnation after official figures last month showed the economy shrank by 0.1% in October.

Sterling showed little movement against the dollar and euro as trading remained slow at the start of 2026. Eased concerns over the budget and Bank of England policies have influenced the currency's direction. Meanwhile, Britain's factory activity saw modest growth, with services data due to be published this week.

Last week, there was precious little activity in the markets as traders took a break to recharge batteries for the New Year. The pound fell to a low of 1.3407 and closed at 1.3457.

Donald Trump has, yet again, demonstrated to the world that he is a dangerous and unpredictable leader. Whatever the administration prefers to call it, the American invasion of Venezuela crossed so many lines in the sand. It raised numerous red flags that friends and foes alike will be deeply concerned about.

To extract the country’s President and his wife to face trial in the U.S. shows a flagrant disregard for the international rule of law.

Typically, the UK Prime Minister was cautious in his response, telling the BBC that he would want to hold urgent talks with President Trump before commenting.

He said he was waiting to establish all the facts but would not "shy away from this, adding he was a "lifelong advocate of international law.

Starmer earlier said the UK had not been involved in Saturday's large-scale strikes on Venezuela, and he had not spoken to Trump about the operation that resulted in the capture of President Nicolás Maduro.

Later on Saturday, the Prime Minister posted on X that the UK "regarded Maduro as an illegitimate president, and we shed no tears about the end of his regime.

"The UK government will discuss the evolving situation with US counterparts in the days ahead as we seek a safe and peaceful transition to a legitimate government that reflects the will of the Venezuelan people," he added.

The government is working with the UK embassy in Caracas to ensure that around 500 British citizens in Venezuela are safeguarded and get appropriate advice.

Critics of the action will doubtless say that the Removal of the Venezuelan leader could be part of a U.S. effort to regain global pricing power as the system remains strained.

Trump has broken several of the pledges he made when elected to a second term, saying at the time that his administration would focus on making America great again, with foreign policy taking a back seat.

Maduro is likely to appear in court today, when the world will learn what charges he faces.

Speaking ahead of a conference on Saturday, Philadelphia Federal Reserve President Anna Paulson noted that “the job market has been bending, not breaking.”

Paulson added that modest additional interest-rate cuts could be appropriate later in 2026, but only if the economy remains benign.

“I see inflation moderating, the labour market stabilising and growth coming in around 2% this year,” Paulson said. If all of that happens, then some modest further adjustments to the funds rate would likely be appropriate later in the year.

Risks to the labour market remained elevated, with a deceleration in labour demand outpacing the supply drain stemming from the Trump administration’s crackdown on immigration. But she noted that claims for unemployment insurance appear to have stabilised. “While the labour market is clearly bending, it is not breaking,” she said.

Despite recent rate cuts, Paulson estimated that current policy remained “a little restrictive,” helping to keep downward pressure on inflation.

The dollar index will be primarily driven by such comments as the market tries to get to grips with Fed policy over the next two quarters. It rallied to a high of 98.50 last week, closing at 98.45, but this is unlikely to indicate its progress in the first few weeks of the year.

Christine Lagarde earns an eye-watering salary of over £625k as President of the European Central Bank, more than three times Keir Starmer's salary. Many would say that she has not delivered value for money during her term, even though inflation and interest rates have tumbled over the last eighteen months.

Lagarde, a French politician, previously served as Managing Director of the International Monetary Fund (IMF) and, before that, as a French Government Minister.

Revealed by Financial Times analysis, Ms Lagarde's pay was initially reported as €466,000 (£405,685) by an ECB report; the paper has calculated it to be 56% higher than the figure provided.

Trade between Germany, the U.S., and China was wrecked in 2025, thanks mainly to the sick man of Europe, according to a report by the Wholesale Foreign Trade Group (BGA) on Friday. Germany’s two biggest export markets have become deadweight, and the BGA doesn’t think 2026 will offer much help. “We do not see a turnaround, but at best a brief respite,” said the President of BGA.

German exports to the U.S. dropped more than 7%, sinking below €150 billion (about $156 billion). China hit harder, with German exports falling 10% to just €81 billion.

A BGA official commented, “U.S. tariffs on European goods acted like ‘sand in the gears of transatlantic trade,' cutting into profits and pushing up costs.” German exporters lost room to breathe. At the same time, the country’s economy faced a combination of deeper issues: a strong euro, high energy prices, excessive red tape, and low investment.

Germany’s HCOB PMI for manufacturing dropped to 47.0 in December, down from 48.2 in November, and anything under 50.0 means shrinking activity, according to the S&P Global.

Export sales also fell for the fifth month in a row, crashing at the fastest rate since December 2024, along with production numbers.

Things were a little better between Germany and China in 2025, when the Government backed homegrown producers, reducing the need for German imports.

Because of that, sectors like automotive, mechanical engineering, and chemicals, where Germany usually leads, got hit the hardest. Local competitors are taking over. This often stabilises global sales, but leads to fewer exports from Germany.

So German companies are adjusting. More of them are building inside China instead of shipping goods in. Some are even taking their money to other Asian markets instead.

Meanwhile, President Xi Jinping was telling his people that China achieved 5% GDP growth in 2025.

He said, “China’s economy is forging ahead under pressure, moving toward innovation and quality, demonstrating strong resilience and vitality. The growth rate is expected to reach around 5%, continuing to rank high among the world’s major economies.”

Whether anyone outside China buys that notion is a different matter. But one thing is certain: Germany’s exporters aren’t seeing that growth in their order books.

The Euro ended 2025 primarily on the front foot, driven mainly by slightly hawkish comments about monetary policy. It reached a high of 1.1789, still shy of resistance at 1.1800. Concerns over large sell orders set around 1.1820 led traders to trim positions into year-end, leading the single currency to close at 1.1717.

Have a great day!