UK political uncertainty linked to Labour leadership and the May elections may weigh on sterling sentiment during the spring. Rabobank notes that sterling’s earlier strength was tied to a rapid repricing of Bank of England policy expectations, which has since partly reversed.
Sterling is the third best performing G10 currency measured since the start of the war in the Middle East. Market pricing implies just over one rate hike over the next six months.
Recent swings in UK market rates point to concern about how well UK inflation expectations are anchored compared with other G10 markets. Inflation risks are also linked to possible energy supply disruption in the Middle East.
For EUR/GBP, the 200-day and 100-day simple moving averages are seen as near-term support around 0.87. Rabobank points to 0.86 as a dip level and 0.88 as a six-month target, implying a gradual move higher.
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Political clouds are once again gathering over the UK, which we see as a distraction for GBP markets this spring. The government is facing pressure ahead of key fiscal statements, creating uncertainty for the Pound. This environment reminds us of the nervousness we saw around the elections back in 2025.
Last week’s UK inflation data, which showed CPI remaining sticky at 2.8%, has reinforced concerns about price pressures. This contrasts with the Eurozone, where inflation has fallen to 2.2%, giving the European Central Bank more room to ease policy. We believe this growing divergence will likely put upward pressure on the EUR/GBP exchange rate.
Consequently, interest rate markets are now pricing in just one 25 basis point rate cut from the Bank of England for the rest of 2026. This limited scope for easing is also influenced by rising energy costs, with Brent crude recently trading above $95 a barrel due to renewed geopolitical tensions. This volatility highlights how exposed UK inflation expectations are compared to other G10 economies.
For derivative traders, this suggests a strategy of buying on dips for the EUR/GBP pair, particularly on any moves back towards the 0.8600 level. We see the potential for the pair to grind higher towards the 0.8750-0.8800 area over the next several months. Options strategies like buying call spreads could be an effective way to position for this gradual upside.
