Rabobank said UK politics may affect Pound sentiment, with attention on Prime Minister Starmer’s position and Labour’s prospects in May elections. It also noted Starmer faced questions in the House of Commons over the hiring of Mendelson as US ambassador.
The bank linked the Pound’s earlier resilience since the start of the Middle East war to a sharp shift in Bank of England policy expectations. It said those expectations have since been reduced, leaving GBP more exposed while inflation and rate volatility remain high.
In March, markets moved from pricing two 25 bps rate cuts this year to predicting rate rises. This month, as expectations for rate rises eased, GBP slipped down the G10 performance league table.
Rabobank added that inflation concerns supported GBP last month but political uncertainty may weigh on UK markets in spring. The piece was produced using an AI tool and reviewed by an editor.
We can see how the political and rate market volatility of 2025 has shaped the current environment for the Pound. Last year, market expectations swung wildly from rate cuts to hikes, creating significant chop for GBP. That underlying nervousness has not entirely disappeared from the market.
While inflation has cooled from the stubborn levels of last year, the latest March 2026 reading of 3.1% remains well above the Bank’s target. With the economy showing signs of stalling after a 0.1% contraction last quarter, the Bank of England is caught in a difficult position. This is creating a clear divergence between holding rates at 5.50% to fight inflation and the growing need to stimulate growth.
Given this tension, we see implied volatility in GBP options ticking up ahead of the next Monetary Policy Committee meeting. Traders should consider strategies that benefit from this uncertainty, such as long straddles on GBP/USD, which can profit from a significant price move in either direction. The market is currently pricing a 75% probability of a rate cut by August, but any hawkish surprise from the Bank could see the pound rally sharply.
We also cannot ignore the political backdrop, which remains fragile following the slim majority secured in the May 2025 general election. Any challenges to the government’s fiscal plans could easily unnerve investors and put immediate downward pressure on sterling. This political risk premium is likely keeping some long-term buyers on the sidelines for now.
