Rabobank’s Senior FX Strategist Jane Foley highlights that UK politics, particularly questions surrounding Prime Minister Starmer’s position and Labour’s prospects in the upcoming May elections, are exerting pressure on GBP sentiment [1]. Foley notes that GBP’s previous strength was largely due to aggressive Bank of England (BoE) tightening expectations, which have now been scaled back, leaving the Pound more vulnerable amid persistent inflation and rate volatility [1].
This week, UK political developments have come to the forefront, with Starmer defending his position in the House of Commons over the hiring of Mendelson as US ambassador [1]. Foley points out that GBP’s strong performance since the onset of the Middle East war was tied to a sharp shift in BoE policy expectations last month, when the market moved from anticipating two 25 basis point rate cuts in 2024 to expecting rate hikes [1].
However, as March’s rate hiking expectations have softened, GBP has slipped down the G10 performance leader board this month [1]. Despite benefiting from inflation concerns last month, Foley expects that ongoing political uncertainty in the UK will continue to worry markets this spring [1].
CONCLUSION
UK political uncertainty and shifting BoE policy expectations have weakened GBP sentiment, with the Pound losing its previous strength as rate hike expectations are pared back. Persistent inflation and volatility, combined with political clouds, are likely to keep UK markets cautious in the near term.