Sterling showed signs of stabilization on Monday after a sharp selloff last week, yet the apparent recovery conceals a currency still grappling with significant headwinds stemming from a combination of domestic political uncertainty and a worsening global inflation shock.
As of 06:10 ET (10:10 GMT), GBP/USD was quoted at 1.3360, up 0.26%, while EUR/USD inched 0.05% higher to 1.1633.
Market context
A global bond selloff deepened on Monday, amplifying inflation concerns as energy prices climbed. Benchmark 10-year U.S. Treasury yields rose to 4.6310%, with the two-year yield reaching 4.1020% - levels described as near their highest since February 2025. The move in yields has strengthened the dollar broadly, a dynamic that has left sterling with limited scope for a sustained recovery.
Pricing in interest rate expectations has shifted accordingly. The CME FedWatch tool shows markets placing a greater than 50% probability on the Federal Reserve raising rates by December, a development that has supported the dollar and complicated sterling's path back toward earlier levels.
Domestic political uncertainty
Investors are closely watching the potential for Greater Manchester Mayor Andy Burnham to enter Westminster via a Makerfield by-election, which may be scheduled for mid-June to early July. Market participants view Burnham as the least fiscally orthodox possibility among those who could take Labour's leadership into Parliament, a factor that has kept a tail risk alive.
Deutsche Bank has noted that Labour's National Executive Committee is now expected to clear Burnham's path to Westminster, prolonging investor unease. Meanwhile, Goldman Sachs has observed that prediction markets had already been pricing in a Labour leadership transition by year-end for some time; sterling's recent relative weakness appears less a function of the prospect of change itself and more a response to a compressed timeline for that change combined with existing macro pressures on the UK's fiscal position.
Goldman Sachs also pointed to moves in EUR/GBP, saying the pair has shifted from trading broadly in line with cyclical fundamentals to embedding roughly 1 percentage point of fiscal premium. That remains below the approximately 2% premium that prevailed for much of last year, which Goldman views as a reasonable near-term reference pending clearer policy signals.
Energy, geopolitics and the UK policy backdrop
Crude oil prices continued to edge toward four-year highs as stalled U.S.-Iran negotiations over the Strait of Hormuz showed no sign of resolution. Renewed frustration from U.S. President Donald Trump with Tehran has heightened concerns that any closure of the waterway could be prolonged, maintaining upward pressure on energy costs globally.
The implications for the UK are material given its reliance on energy imports. Markets currently price in nearly three Bank of England rate hikes this year. Bank Chief Economist Huw Pill reinforced the argument for further tightening last week, stating that the energy-driven inflation shock requires a firm policy response.
Near-term outlook
Until the uncertainty around the Makerfield by-election is resolved and tensions that affect passage through the Strait of Hormuz ease, any recovery in sterling is likely to remain fragile. A combination of elevated U.S. yields, a stronger dollar and higher energy prices continues to constrain the pound.
Key points
- GBP/USD traded at 1.3360, up 0.26% as of 06:10 ET (10:10 GMT), while EUR/USD was 1.1633, up 0.05%.
- US 10-year Treasury yields rose to 4.6310% and two-year yields to 4.1020%, both near recent multi-month highs, bolstering the dollar and pressuring sterling.
- Political developments in the UK - notably the prospect of Andy Burnham entering Westminster via a potential mid-June to early July Makerfield by-election - and stalled U.S.-Iran talks over the Strait of Hormuz are central near-term risks for the pound and for energy-sensitive sectors.
Risks and uncertainties
- Political risk - The potential entry of Andy Burnham into Westminster and its implications for Labour's leadership path are creating sustained investor unease, affecting sterling and UK-sensitive assets.
- Geopolitical and energy risk - Stalled negotiations over the Strait of Hormuz and the prospect of prolonged disruption are keeping crude prices elevated, which in turn feeds inflationary pressure and complicates monetary policy decisions.
- Monetary policy and bond market moves - A deeper global bond rout and higher U.S. yields increase the chance of further Fed tightening this year, supporting the dollar and constraining sterling's recovery.
Until clearer outcomes emerge on both the political front in the UK and the geopolitical situation affecting energy routes, market participants should expect sterling's recovery to remain tentative and vulnerable to fresh shocks.