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Marc Cogliatti, Global Capital Markets Director at Validus Risk Management, has urged clients to tread carefully on sterling, warning that political and fiscal uncertainty continue to cloud the outlook.
Validus advises institutional investors and fund managers on managing market risks, and Cogliatti says the current environment demands a cautious approach to pound sterling.
He explains that last month’s Bank of England meeting, which ended in a rare three-way split before a narrow 25bp rate cut was agreed, underlined how uncertain the policy outlook has become.
"A month on, the outlook for the UK economy remains just as blurry – if not more so," Cogliatti says in a briefing released October 02.
With the Bank not meeting again until November 06, he says market attention has shifted to politics, where Chancellor Rachel Reeves's Labour conference speech promised tough fiscal choices without risking stability.
Reeves pledged to keep taxes, inflation and interest rates "as low as possible," but Cogliatti argues that either tax rises, spending cuts, or a combination of both will ultimately be required to hit Labour's fiscal rules.
The scale of those measures will depend heavily on the Office for Budget Responsibility’s forecasts due Friday, especially its growth outlook.
Cogliatti also points to lingering gilt market jitters, recalling that in early September the yield on the 30-year UK benchmark bond reached its highest since the late 1990s.
Although yields have since eased back, he stresses that they remain "elevated by historical standards" and that investors remain uneasy about the fiscal picture.
On the currency side, sterling has been relatively steady against the dollar, helped by weakness on the US side, but is down almost 1% against the euro.
That leaves GBP/EUR "towards the bottom of its recent range," with signs it could be breaking lower, Cogliatti says.
Looking ahead, Validus still expects GBP/USD to move higher, but Cogliatti emphasises that this forecast rests "on the premise of a weaker dollar" rather than pound strength itself.
Against the euro and other G7 currencies, the firm remains cautious, citing elevated gilt yields, political uncertainty and fiscal risks as reasons to hold back.
"There is little reason to be bullish on the pound," he concluded, adding that while positioning data shows a significant short stance in sterling, it is not yet stretched enough to force a rebound.
For now, Validus Risk Management’s message to clients is clear: approach pound sterling with caution.