File image of Starmer and Rayner. Picture by Lauren Hurley / No 10 Downing Street.
Canadian investment bank Desjardins has a warning for those counting on a stronger pound: don't bet on it.
The bank has released its latest forecast update and confirms it holds a prediction for significant pound sterling weakness over the coming months. "Overall, we remain bearish on the GBP against both the USD and EUR," it says.
The following factors are cited for the bearish GBP stance:
Politics
The May local elections are widely considered a risky moment for Prime Minister Keir Starmer who is expected to see his Labour Party lose significant ground.
"The ruling Labour party is poised for heavy losses in nationwide local elections on May 7, which we expect will trigger a leadership challenge against Prime Minister Keir Starmer. While there could be several contenders, the most likely candidates to replace the PM would be either Angela Rayner or Wes Streeting," says Desjardins.
Analysts explain Rayner would start off with a credibility deficit due to her prominent role in forcing the government to U-turn on plans for fiscal consolidation.
"Meanwhile Streeting would be seen as the continuity candidate. Put simply, the leadership change is unlikely to result in a significant improvement in fiscal governance or jump start stalled tax and entitlement reforms," says the research note.
Debt Dynamics and Faltering Growth
Public sector borrowing data released Thursday showed the government borrowed more than expected in March, supporting another rise in UK bond yields (i.e. the cost of government borrowing). They are already elevated compared to those of similar economies and concerns about the trajectory of the country's finances are a perennial headwind for the pound.
"The spread between 10‑year gilt and US Treasury yields remains close to 60bps, the widest in 25 years, reflecting some of these concerns," says Desjardins.
Domestic growth is also expected to be challenging for the British pound, with the IMF recently lowering UK growth projections by the largest margin among developed nations from 1.3% to just 0.8%.
"The multilateral institution echoed our concerns about faltering nominal growth, rising public debt and eroding institutional credibility," says Desjardins.
Bank of England Becomes a Headwind
To be sure, the pound-euro exchange rate has risen this week on the back of some consensus-beating economic data releases, which all point to a limited chance that the Bank of England lowers interest rates.
That firming in rate expectations tends to support sterling.
However, Desjardins "are not sure whether the market would reward the pound if the Bank hiked rates due to surging energy prices, or whether it would punish it for potentially pushing the UK over the fiscal cliff."
Desjardins maintains a 2026 forecast for the GBP to fall to 1.30 vs USD and to 0.92 vs EUR. That's a pound-to-euro target at 1.0870.
That's well below the consensus of investment bank forecasts as per our Q2 poll of tier-1 investment bank forecasts and sends a warning of significant potential downside risks.