UK political uncertainty around Prime Minister Starmer is holding back sterling. EUR/GBP is staying close to 0.8700, and on a 5-day view GBP is the weakest G10 currency.
Rabobank expects EUR/GBP to trade between 0.86 and 0.87 over the next month. It still sees EUR/GBP moving higher into mid-year and beyond.
Political Risks And Sterling Outlook
The bank says the main downside risk for GBP is a return of market focus on UK politics, with tensions potentially rising into spring. It also notes that the Bank of England is one of the few remaining G10 central banks that markets still expect to cut rates again.
The note says GBP can react strongly to changes in UK long-term interest rates because the UK runs a current account deficit. It adds that gilts may be more vulnerable to negative headlines than debt in countries that have large domestic savings.
Rabobank forecasts EUR/GBP at 0.89 over 12 months.
A year ago, political uncertainty around Prime Minister Starmer was a key reason the pound struggled. In early 2025, this risk helped make Sterling the worst-performing G10 currency over a five-day period. That same political fragility is still limiting the currency’s upside.
Markets Focus On Rates And External Funding
Expectations for Bank of England rate cuts have also played out, adding pressure to Sterling. The BoE cut rates twice in late 2025, taking the policy rate down to 4.25%. By contrast, the European Central Bank has kept its key rate at 4.50%, which makes the euro more attractive on yield.
This gap in rates matters even more because of the UK’s current account deficit, which was 3.5% of GDP in the latest reported quarter of 2025. Because the UK relies on foreign capital, the pound and UK government bonds (gilts) can be quick to weaken on bad news. You can see this in how fast gilt yields move after negative headlines compared with German bund yields.
Last year’s call for EUR/GBP to reach 0.89 has been very close, with the pair now trading near 0.8880. Over the next few weeks, traders may look at ways to benefit if the pound stays weak versus the euro. One defined-risk approach is buying EUR/GBP call options with a strike around 0.8950 to gain if the uptrend continues.
With ongoing political and economic uncertainty, implied volatility in the pound remains high. This can make selling out-of-the-money GBP puts against the US dollar a potential way to collect premium, especially for traders who think support is forming near $1.20. Another option is a long straddle, which positions for a big move either way if a new political trigger appears.
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