Scotiabank strategists Shaun Osborne and Eric Theoret highlight that the Pound (GBP) is underperforming as political uncertainty around PM [Prime Minister] Starmer and fiscal policy weighs on sentiment, even as widening United Kingdom (UK) - United States (US) spreads support GBP fundamentals. Markets see limited Bank of England (BoE) action this week but price gradual tightening into year-end. Technically, GBP/USD remains in a 1.3450–1.35s range, with the longer-term trend from early 2025 still positive.

Political risk offsets supportive spreads

"The pound is weak, down 0.4% vs. the USD and a relative underperformer on the crosses with weakness driven by a combination of both domestic and external developments."

"Domestically, market participants are assessing the ongoing political uncertainty surrounding PM Starmer’s leadership and the implications for fiscal policy, given that much of the recent rebuilding of confidence has been linked to Chancellor Reeves and her adherence to self-imposed fiscal rules."

"In terms of the BoE, markets are pricing little chance of a hike for Thursday’s decision but 16bpts for June and a cumulative 60bpts by December."

"The recent widening of UK-US spreads is extending and threatening fresh highs, offering fundamental support to the GBP."

"However, sentiment continues to dominate and the options market is signaling a marginal build in the premium for protection against GBP weakness."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)