GBP: Energy shock and politics weigh – Rabobank

FXStreet Insights Team FXStreet

Rabobank’s Senior FX Strategist Jane Foley highlights that despite recent Pound resilience, UK risks remain elevated. Foley warns that an energy shock could add around 65 bps to UK CPI by mid-year, limiting BoE easing. Combined with high public debt, fragile growth, and potential political instability around Labour and PM Starmer, Foley expects Sterling-supportive short-covering to fade over the coming months.

Sterling support seen losing momentum

"There is no shortage of gloom in the UK press at present regarding the potential for higher oil and gas prices to impact domestic inflation, growth and public finances. Issues related to public finances have not strayed too far from the headlines since the Truss mini-budget in September 2022. The UK’s high public debt, Chancellor Reeves’ limited (though improved) fiscal headroom and the sensitivities of the gilt market all make frequent forays into the mainstream press."

"Thus, concerns as to how a prolonged spike in gas prices could erode the Chancellor’s headroom in addition to undermining UK growth have been widely discussed in recent days. Although there has been a pullback in oil and gas prices today and we will be closely monitoring the situation, it is Rabobank’s concern that the energy crisis could add around 65 bps onto UK CPI inflation by mid-year."

"In our view this could leave the headline rate at 2.7%, rather than at the previously forecast level of 2%. If the energy market extends today’s more stable tone, we will re-evaluate, but for now we are doubtful if the BoE will be able to cut rates any further this year."

"Moreover, May brings local elections for England and parliamentary elections for Wales and Scotland. A poor showing for Labour could trigger a leadership election for Starmer. The possibility of a strong left-wing candidate would worry the markets particularly."

"If higher wholesale energy prices persist into May, popular opinion against Starmer could deteriorate further and enhance these risks. Faced with this possibility, we would expect the recent positive impact on GBP from position adjustment to run out of steam."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

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