Gains May Fade As Bank Of England Pricing Looks Overdone

The British Pound has been one of the stronger performers in the G10 since the escalation of the Middle East conflict, but Rabobank warns the rally may not last.

Pound Sterling was seen trading modestly firmer on the day, with GBP/EUR at 1.1512 and GBP/USD at 1.3206, supported by a sharp shift in Bank of England rate expectations.

FX strategists at Rabobank say the British pound’s recent strength reflects an aggressive repricing of UK monetary policy.

“After the USD, the pound is the second best performing G10 currency since the start of the war,” the bank noted.

Markets have moved from expecting rate cuts to pricing in two to three hikes over the next year, driven by rising inflation risks linked to higher energy prices.

However, Rabobank believes this shift has gone too far.

“Three rate hikes appears excessive,” the bank said, with its BoE watcher seeing scope for just one hike, potentially as soon as April.

The repricing has been sharper in the UK than elsewhere, partly because inflation was already elevated before the crisis.

“UK CPI inflation was already relatively high,” Rabobank said, noting the Bank now expects inflation to remain around 3% in Q2, above earlier forecasts.

Despite this, the UK economy entered the crisis on weaker footing than many peers.

“Growth was already modest, leaving the economy vulnerable,” Rabobank said, pointing to weak GDP readings heading into 2026.

That raises the risk that tighter policy could exacerbate downturn pressures.

“Aggressive tightening would increase recession risks,” the bank warned.

Fiscal constraints add another layer of concern. While targeted government support for households is likely, any large-scale intervention could unsettle gilt markets.

“A spike in household energy bills risks damaging demand,” Rabobank said, adding that policy trade-offs are becoming more difficult.

Political risks are also rising ahead of May elections, with the potential for renewed leadership uncertainty within the Labour party.

“Political developments could be unsettling for both gilts and the pound,” the bank said.

Against this backdrop, Rabobank expects sterling to lose ground against European peers in the coming months.

“We expect EUR/GBP to trade in the 0.87 to 0.88 area on a 3–6 month view.”

For now, the pound’s strength reflects rate expectations.

But with growth fragile, policy uncertain and political risks building, Rabobank’s message is clear: the rally may prove temporary.