UK political uncertainty around Prime Minister Starmer’s leadership is limiting support for sterling. EUR/GBP is holding near 0.8700, and GBP is the weakest G10 currency on a 5-day view.
Rabobank expects EUR/GBP to trade in a 0.86 to 0.87 range over a 1-month view. It still projects EUR/GBP to move higher into the middle of the year and beyond.
Political Risks And Sterling Outlook
The bank links downside risks for GBP to renewed market focus on UK politics and the potential for political tensions to worsen into spring. It also points to expectations that the Bank of England is among the few remaining G10 central banks widely expected to cut rates again.
The note says GBP can be sensitive to changes in UK long-term interest rates because of the UK current account deficit. It adds that gilts may be more exposed to negative news than debt markets in countries with large domestic savings.
Rabobank forecasts EUR/GBP at 0.89 on a 12-month view.
Looking back a year, we saw that political uncertainty surrounding Prime Minister Starmer was a key factor limiting the pound’s strength. Back in early 2025, this risk was a primary reason Sterling was the G10’s worst performer over a five-day stretch. That underlying political fragility continues to weigh on the currency’s potential.
Markets Focus On Rates And External Funding
The expectation for Bank of England rate cuts we noted has also come to pass, further pressuring Sterling. The BoE delivered two rate cuts in late 2025, bringing its policy rate down to 4.25%. This contrasts with the European Central Bank, which has maintained its key rate at 4.50%, making the euro more attractive on a yield basis.
This rate differential is especially important because of the UK’s current account deficit, which stood at 3.5% of GDP in the last reported quarter of 2025. This reliance on foreign capital makes the pound and UK government bonds, or gilts, particularly vulnerable to bad news. We see this sensitivity in how quickly gilt yields react to negative headlines compared to German bunds.
The forecast made last year for EUR/GBP to reach 0.89 has been remarkably accurate, with the pair now trading near 0.8880. For the coming weeks, traders should consider strategies that benefit from the pound remaining weak against the euro. Buying EUR/GBP call options with a strike price around 0.8950 offers a defined-risk way to profit if this upward trend continues.
Given the persistent political and economic uncertainty, implied volatility for the pound remains elevated. This makes selling out-of-the-money GBP puts against the US dollar a viable strategy for earning premium, especially for traders who believe a floor is forming around the $1.20 level. Alternatively, strategies like long straddles could be used to position for a sharp move in either direction should a new political catalyst emerge.
