Commerzbank says the recent rise in sterling may fade, due to high Bank of England (BoE) rate expectations and renewed UK political risk. It sees EUR/GBP moving towards 0.89 in the coming weeks, while GBP/USD is expected to rise gradually over the longer term, with current pound levels not seen again until 2027.
Sterling is one of five G10 currencies with a positive performance since the start of the war, alongside four major commodity exporters. Commerzbank links this to expectations of a decisive BoE response and a political risk premium that was reduced in early March.
Sterling Strength May Prove Temporary
Market pricing has shifted from expecting two rate cuts by year-end to, at times, more than three rate rises. Commerzbank expects the BoE may raise rates once, then attention may return to rate cuts in the second half of the year, which could unwind sterling gains tied to rate pricing.
EUR/GBP is trading near 0.86. Commerzbank says local election outcomes could add pressure, but expects political risk to ease later in the year and for sterling to recover after that.
Looking back at the analysis from early 2025, we were doubtful that the Pound’s strength would last. We saw its performance as being built on overly aggressive Bank of England (BoE) rate expectations and a temporary dip in political risk. Those doubts proved to be well-founded, and the same themes are re-emerging today.
The massive repricing of BoE expectations that gave the Pound a boost last year has now fully unwound. Back in 2025, the market moved from expecting cuts to pricing in more than three hikes, a shift we viewed as unsustainable. As we predicted, the focus has since shifted back towards eventual rate cuts, weighing on the currency.
BoE Caught Between Inflation And Weak Growth
Currently, the EUR/GBP exchange rate is trading around 0.8750. With the latest data showing UK inflation remaining sticky at 2.8% while Q1 2026 GDP growth was a sluggish 0.1%, the BoE is in a difficult position. This economic backdrop makes further rate hikes highly unlikely.
We believe the BoE will hold rates steady for now, but the market is increasingly pricing in the possibility of a cut before the end of the year to support the weak economy. This expectation gap between the UK and the more hawkish European Central Bank supports further Pound weakness. Derivative traders should view this as an opportunity to position for a higher EUR/GBP exchange rate in the coming weeks.
Considering this outlook, traders could look at buying EUR/GBP call options with a strike price around 0.8800, targeting a move towards our original 0.8900 forecast. Using call spreads could also be a viable strategy to lower the upfront cost of the position. This allows for participation in the upside potential while defining risk.
Political uncertainty is also creeping back into the market, just as it did around the local elections in 2025. Now, the focus is on the upcoming general election and the potential for a significant shift in fiscal policy. This renewed political risk premium is likely to add further downward pressure on the Pound.
