Could The Pound Sterling Fall Further? Rabobank Thinks So

Pound Sterling Forecast: Rabobank Warns of a “Long, Hot Summer” for GBP

The British Pound has stabilised after a difficult few weeks, but foreign exchange analysts at Rabobank believe Sterling still faces significant political and monetary-policy headwinds that could limit any recovery.

The Pound to Dollar exchange rate (GBP/USD) traded at 1.3235 on Friday, close to its lowest levels of June, while EUR/GBP held near 0.8665 after rising steadily from April lows around 0.8620.

Political Uncertainty Looms Over GBP

Rabobank argues that Andy Burnham’s victory in the Makerfield by-election has increased the risk of a Labour leadership challenge and prolonged political uncertainty.

“Political uncertainty tends to be a negative currency factor almost irrespective of its cause.”

The bank warns that uncertainty over who leads the UK could persist into September, creating a difficult backdrop for both the Pound and gilt market.

“There is every reason for GBP investors to be nervous.”

Rabobank notes that the UK remains dependent on foreign capital inflows because of its persistent current-account deficit, leaving Sterling vulnerable during periods of political instability.

Alongside politics, Rabobank believes markets remain too optimistic about the prospect of further Bank of England tightening.

“RaboResearch is now forecasting no change in BoE rates through to the remainder of the year.”

The bank argues that spare capacity in the labour market and softer inflation data reduce the need for higher rates, despite concerns over energy prices.

“Given that the market is still priced for a hike this year, a repricing of expectations in line with our view has negative implications for the pound.”

Pound Sterling Forecast: GBP/USD Could Dip to 1.32

Rabobank expects political uncertainty and a less hawkish Bank of England to weigh on Sterling through the summer.

The bank forecasts GBP/USD at 1.32 over the next one to three months, before only a modest recovery to around 1.34 over the next year.

Against the Euro, Rabobank expects EUR/GBP to move towards 0.87 in coming months and gradually rise towards 0.89 by 2027, implying further Pound weakness.

“The combination of a potentially more dovish policy outcome from the MPC than is currently priced in, coupled with the likelihood of political uncertainty is suggestive of headwinds for the pound.”