Pound Regains Ground as Bond Rout Deepens. Forecast as of 18.05.2026 | LiteFinance
The Labour Party has made Keir Starmer the scapegoat for its defeat in the local elections. However, the party itself is actually to blame. As a result, investors are fleeing the bond market. Let’s analyze the situation and develop a trading plan for the GBP/USD pair.
The article covers the following subjects:
Major Takeaways
- The British Prime Minister may be forced to resign.
- Investors are demanding a higher risk premium.
- The pound may lose a key advantage.
- Short positions opened at 1.355 can be increased on upward pullbacks.
Weekly Fundamental Forecast for Pound Sterling
When roughly a third of a country’s debt is held by foreign investors, its currency becomes highly vulnerable to political turmoil. The pound fell to a five-week low as Keir Starmer faces mounting pressure over his political future. Around one hundred Labour MPs are reportedly calling for his resignation, triggering a sharp sell-off in government bonds and placing significant pressure on GBP/USD quotes.
Local Election Results in UK
Source: Bloomberg.
The ruling party suffered a decisive defeat, losing the local elections to Reform UK. Since political defeats in the UK tend to be personalized, Keir Starmer has become the scapegoat. In reality, however, the blame lies with the Labour Party, which failed to deliver on its campaign promises. They failed to boost the economy and were forced to raise taxes.
As a result, Manchester Mayor Andy Burnham, who has a net positive political rating, could take the prime minister’s seat. His platform, which includes halving income tax rates and increasing borrowing to fund defense spending, is forcing bondholders to demand a higher risk premium. It is widely believed in the market that only yields of 5.3% on 10-year bonds and 6% on 30-year bonds will attract non-residents.
Such a scenario would likely require a prolonged sell-off. Moreover, the political crisis in the UK has emerged at a particularly unfavorable moment. The conflict in the Middle East has intensified fears of accelerating inflation and significantly tighter monetary policy. Investors are increasingly concerned that consumer price growth could climb to 5%, potentially forcing the Bank of England to raise the repo rate three times in 2026.
Bond Yields in UK, US, Italy, and Germany
Source: Bloomberg.
In April, expectations of aggressive monetary tightening supported the GBP/USD pair. However, markets now believe that European central banks would make a political mistake by doing so. They would damage already crippling economies due to higher borrowing costs. The problem is particularly acute in the UK, where bond yields are the highest among major European countries.
Rising political risks, a sell-off in debt securities, and the futures market’s downward revision of the expected scope of monetary tightening became the main drivers behind the collapse in GBP/USD quotes. Only profit-taking on long positions in the US dollar—which posted its best weekly performance in two months—allowed the pair to regain some ground.
Weekly Trading Plan for GBP/USD
The GBP/USD pair remains vulnerable. At the same time, a weakening labor market, slowing PMI growth, and easing inflation could reduce the likelihood of further repo rate hikes, stripping the pound of its key advantage. As a result, short positions initiated below 1.355 may be increased during corrective rebounds.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
Source link
