Recent UK local elections have intensified political uncertainty, prompting Deutsche Bank's Shreyas Gopal to reiterate a long EUR/GBP position, citing expectations that political instability will persist through the summer [1]. The British Pound (GBP) had remained relatively stable despite a surge in UK political headlines, but news regarding Andy Burnham's potential path to Prime Minister triggered a sharp move in the currency [1][2]. Deutsche Bank estimates that the EUR/GBP risk premium has climbed above 2% following the latest developments, though it has not yet reached last year's pre-Budget extremes [1]. ING's Francesco Pesole also notes that the risk premium (EUR/GBP short-term overvaluation) is now 0.8%, which is becoming material but remains below the 2%+ levels seen during previous periods of intense political or fiscal concern [2]. Both analysts see upside risks for EUR/GBP as political risk persists [1][2].
The market has responded with increased volatility around the Pound. The GBP/JPY cross experienced follow-through selling for the second consecutive day, dropping to a one-and-a-half-week low near 211.75, down 0.25% for the day [3]. The British Pound's underperformance is attributed to the deepening UK political crisis, which has become a key factor weighing on GBP/JPY [3]. Technical analysis indicates that the path of least resistance for GBP/JPY is to the downside, with momentum indicators such as the RSI and MACD reinforcing the negative tone [3]. Initial support is seen at the 61.8% Fibonacci retracement at 210.79, with further downside targets at 209.23 and 207.26 if selling pressure continues [3].
In the broader currency market, the Japanese Yen was the strongest against the British Pound this week, as shown in a comparative table of major currencies [3]. Meanwhile, in the EUR/USD pair, ING highlights a significant technical break below 1.170, opening the possibility for a test of 1.160 in the coming days [2]. The EUR:USD two-year swap rate gap has widened by 20 basis points from -80bp to -100bp since the start of the week, removing a key source of Euro resilience versus the US Dollar [2].
Looking ahead, Deutsche Bank expects the FX volatility market to price in event risk around potential by-election dates, possibly from mid-June to early July [1]. Both Deutsche Bank and ING emphasize that political risk remains a key driver for the Pound and EUR/GBP, with further upside risk for the cross if uncertainty persists [1][2].
CONCLUSION
UK political uncertainty following local elections has led to a notable increase in the EUR/GBP risk premium and a marked underperformance of the British Pound, particularly against the Euro and Japanese Yen. Analysts from Deutsche Bank and ING see continued upside risk for EUR/GBP as political instability lingers, with market volatility expected around potential by-election dates. The technical outlook for GBP/JPY and EUR/USD also points to further downside for the Pound and Euro, respectively, amid shifting rate differentials and risk sentiment.