The Pound and UK gilts rebounded as worries about UK fiscal policy and inflation eased. GBP/USD rose from 1.3303 on 18 May towards the 200-day moving average near 1.3420, while long gilt yields fell.
A spokesperson said Andy Burnham plans to keep current fiscal rules, limiting scope to loosen policy if he becomes prime minister. The report described this as a policy U-turn that reduced near-term pressure on the Pound and gilts.
Inflation Concerns Ease
UK data showed a larger-than-expected drop in core and services inflation. The report said this lowered concerns about persistent inflation and suggested underlying inflation was slowing before an energy price shock intensifies into summer.
After the CPI release, UK rate markets reduced expectations for Bank of England tightening. The first hike was pushed back to July or September, with about 50bps of rises priced in by year end.
The article said risks for the Pound remain skewed lower due to the energy price shock and UK political uncertainty. It also noted the piece was produced with an AI tool and reviewed by an editor.
Looking back to this time last year, in May 2025, we saw the pound stage an impressive rebound as fears over fiscal risks and inflation eased. The GBP/USD pair bounced from a low near 1.3300 back towards its 200-day moving average as markets pushed back expectations for Bank of England rate hikes. That period of calm was driven by softer inflation reports and promises of fiscal discipline.
From Relief Rally To Reality
Those downside risks we worried about, particularly from the energy price shock, did materialize through the winter of 2025, weighing on the currency. The pound subsequently struggled to maintain its footing as the economy slowed more than anticipated. We have seen this pattern before, where relief rallies give way to underlying economic realities.
Now, the situation has shifted again, with recent data showing Q1 2026 GDP growth at a sluggish 0.2%, narrowly avoiding a technical recession. April’s CPI data shows inflation remains stubbornly high at 2.8%, well above the Bank of England’s 2% target. This puts the central bank in a difficult position, having to choose between fighting inflation and supporting a fragile economy.
This environment of persistent inflation and weak growth suggests continued volatility for the pound in the coming weeks. Traders might consider buying straddles or strangles on GBP/USD to profit from a significant price move in either direction. This strategy benefits from an increase in implied volatility without needing to predict whether the news will be positive or negative.
With the Bank of England’s Bank Rate currently at 5.50%, the market is now pricing in a roughly 60% chance of another 25-basis-point hike by August. To hedge against potential disappointment or a sharp economic downturn, one could look at buying out-of-the-money put options on GBP/USD. This offers a low-cost way to protect a portfolio against a sudden drop in the pound’s value.
The upcoming general election introduces another layer of political uncertainty, reminiscent of the concerns we had back in 2025. Selling covered calls against an existing long pound position could be a strategy to generate income from the options premium. This approach is useful while waiting for a clearer political and economic picture to emerge later in the year.
