Prediction and Pound to Dollar Forecast: UK Political Risks Cloud GBP Outlook

Modified: Monday, 11 May 2026 08:01 BST - Written by Tim Boyer

STORY LINK Prediction and Pound to Dollar Forecast: UK Political Risks Cloud GBP Outlook

The Pound to Dollar exchange rate (GBP/USD) faces a fresh test as markets assess the political fallout from heavy Labour election losses alongside ongoing geopolitical uncertainty in the Middle East.

Sterling has remained relatively resilient near recent highs, but investors are increasingly wary that rising UK political instability and fragile global risk sentiment could trigger renewed volatility for GBP/USD in the weeks ahead.

GBP/USD Forecasts: Political and economic tests

Scotiabank expects very limited Pound to Dollar (GBP/USD) exchange rate gains to 1.37 by the end of this year as the dollar loses ground.

Credit Agricole expects a GBP/USD retreat to 1.31 amid a firm dollar and vulnerable risk conditions.

Political developments will have a significant impact following heavy losses for Labour in English local elections as well as a major defeat in the Welsh Senydd election. The outcome will inevitably increase pressure on Prime Minister Starmer with bond markets watching closely.

Nick Rees, head of macro research at Monex Europe commented; "We don't think any of the alternatives to Starmer are likely to be sterling positive. Angela Rayner, clearly from the left of the party, would scare bond markets, as likely would Andy Burnham."

Middle East developments will also be crucial for near-term dollar and Pound moves. The dollar has lost ground amid hopes that some form of Iran-US deal can be secured.

ING commented; “If this proves to be another episode of misplaced optimism on a US-Iran deal, not only does the dollar have plenty of upside room to recover, but there’s a good chance investors will prove more cautious and won’t jump as aggressively into de-escalation trades.”

Credit Agricole is cautious over the near-term Pound outlook; “We note that some of the legacy market GBP shorts have been unwound by now and that many BoE-related positives are already in the price of the currency. This could make the GBP more vulnerable to any potential risk aversion spikes from here.

Longer-term fundamentals will also be a key element and Scotiabank sees dollar vulnerability; “Structural trends continue to favour longer-term weakness for the USD. The country’s trade and fiscal balances remain wide and historically extended. They are expected to widen further over time.”

It added; “Portfolio adjustment flows are an additional longer-term risk as global investors consider their over-exposure to a historically elevated USD following an extended run of tech-driven US equity market outperformance. The prospect of greater hedging activity or outright reallocation out of USD assets poses a major risk to the big dollar.”

The Pound is also potentially vulnerable on economic and political grounds.

Scotiabank notes potential vulnerability which would hold abc GBP/USD; “The UK’s challenging fiscal situation has left it in a relatively precarious position, requiring a considerable amount of reassurance to existing debt holders and prospective bond buyers. Political uncertainty remains elevated as market participants assess the ongoing challenges facing PM Starmer, with corresponding uncertainty related to Chancellor Reeves’ future.”

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TAGS: Pound Dollar Forecasts