Sterling has weakened only modestly as the UK faces political change, with the country heading for a seventh Prime Minister since the Brexit vote 10 years ago. In FX markets, EUR/GBP is seen moving one to two percentage points higher, while GBP/USD is expected to test 1.30 over the summer. The pound remains below pre-Brexit levels, and inflation is eroding any valuation support, with the balance of payments also weighing on the currency.
Attention is shifting to the US Dollar after last week’s Federal Open Market Committee meeting reset market tone. Near-term direction is expected to hinge on US data, including second-tier real economy releases and the Personal Consumption Expenditures (PCE) Price Index. Forecasts for May’s core PCE deflator are for a 0.4% m/m rise and 3.5% y/y, a combination that could lift the dollar and steer broader FX moves.
The US Dollar as the Primary Market Driver
We see the US dollar as the main driver for currency markets over the coming weeks, overpowering local UK politics. We are closely watching the upcoming Personal Consumption Expenditures (PCE) Price Index data for May. The minutes from the June 12th FOMC meeting already revealed that several members see upside risks to inflation, suggesting the Fed is in no rush to cut rates.
This backdrop of a potentially stronger dollar makes a test of 1.30 for GBP/USD likely this summer. The pound is also vulnerable on its own, with the latest UK CPI data for May 2026 coming in at a stubborn 3.9%. Furthermore, the UK’s first-quarter current account deficit widened to 5.8% of GDP, highlighting a fundamental weakness.
For derivative traders, this points towards positioning for a stronger dollar against a weaker pound. We believe buying GBP/USD put options with expiries in late July or August is a sensible way to trade this view. This strategy would profit from a move lower in the exchange rate while having a clearly defined risk.
Volatility and Sterling-Specific Risks
This market environment is reminiscent of late 2024, when sticky US inflation data repeatedly pushed back expectations for Fed rate cuts and fueled a significant dollar rally. We expect implied volatility to rise ahead of this week’s PCE data release. Therefore, establishing positions sooner may be more cost-effective before that volatility gets priced in.
We also anticipate the EUR/GBP exchange rate will climb one to two percentage points higher. This is not driven by Euro strength, but rather by the pound’s specific vulnerabilities. The market is simply pricing in more risk for Sterling given its inflation and balance of payments issues.
