Sterling rose 0.25% to about 1.3230 against the US dollar in European trading on Monday, outperforming major peers as UK politics pointed to continuity in fiscal policy. Greater Manchester Mayor Andy Burnham, positioned as the frontrunner to succeed Prime Minister Keir Starmer, pledged to stick to the Labour Party’s 2024 manifesto. With no policy shift implied, markets priced a steadier outlook for government borrowing costs; 10-year UK gilt yields erased earlier gains and eased to around 4.73%.
Attention also turned to monetary policy, with traders looking for clues on how long the Bank of England will keep Bank Rate at 3.75%. The BoE held rates this month by a 7-2 vote, and MPC member Megan Greene supported a rise, citing second-round inflation risks. The US dollar edged lower ahead of June US Nonfarm Payrolls due on Thursday, a key input for the Federal Reserve outlook, while CME FedWatch puts the probability of at least one Fed rate increase this year at nearly 80%.
Political Stability And Fiscal Outlook Support Sterling
We see the British Pound holding firm due to the political stability established since the 2024 general election. This fiscal predictability provides a solid base for the currency, contrasting with the volatility seen in prior years. As a result, we are less concerned about surprise policy shifts from the UK government impacting our positions in the short term.
The Bank of England’s policy path, however, remains a key variable, with markets closely watching for signals on the timing of further interest rate adjustments from the current 4.5% level. UK inflation, which recently fell to 2.1% in the latest data for May 2026, supports the case for a steady hand from the central bank for now. This suggests that implied volatility in GBP options may be underpriced, presenting opportunities for traders anticipating a future catalyst.
Fed-BOE Policy Divergence And Positioning Opportunities
Our primary focus is now shifting to the United States and the upcoming Nonfarm Payrolls (NFP) report for June, which is due next week. A strong jobs number, similar to the upside surprises seen frequently in 2024 when prints often exceeded 250,000, would reinforce the Federal Reserve’s cautious stance on cutting rates. This would create a significant headwind for the GBP/USD currency pair.
This policy divergence, with the Fed remaining more hawkish than the Bank of England, is the central theme we are trading. The CME FedWatch Tool indicates futures markets are pricing in less than a 30% chance of a Fed rate cut before the fourth quarter. We are therefore positioning for potential US dollar strength by looking at bearish derivative structures, such as buying GBP/USD put options dated for late July.
