Deutsche Bank analysts Shreyas Gopal and Sanjay Raja report that the EUR/GBP currency pair continues to trade above levels implied by Bank of England (BoE) and European Central Bank (ECB) rate differentials, indicating a measurable risk premium in the Pound (GBP) due to ongoing United Kingdom (UK) political uncertainty and higher gilt yields following the energy shock [1]. The analysts note that the current risk premium is approximately 2%, which, while smaller than before last year’s Budget, remains moderate in size [1].
The report highlights that if the upcoming May election results are particularly poor for the Labour Party, potentially triggering a leadership challenge over the summer, these risk premia are expected to persist in UK fixed income and currency (FIC) markets. The extent to which the risk premium could widen further would depend on the policy stance of any new leadership and the measures they implement [1].
Additionally, the analysts reference a Financial Times report suggesting that the 'soft left' faction of the Parliamentary Labour Party is gradually supporting some welfare spending reforms. Such reforms could be viewed positively by the gilt market and may partially offset concerns about higher spending in other areas [1].
Deutsche Bank's base case is that the BoE will not change the Bank Rate in the near term, but they flag significant upside risks to this view. The potential for rate hikes has increased and could materialize in late Q2-2026 or early Q3-2026, depending on forthcoming BoE decisions [1].
CONCLUSION
The EUR/GBP pair is trading with a moderate risk premium due to UK political uncertainty and higher gilt yields. While the risk premium has decreased since last year’s Budget, it remains notable, and future developments—particularly around UK political leadership and BoE policy—could influence market direction.