GBP/USD Forecast: Pound Sterling "Defensive" as UK Gilts Underperform

Modified: Tuesday, 12 May 2026 20:01 BST - Written by Frank Davies

STORY LINK GBP/USD Forecast: Pound Sterling "Defensive" as UK Gilts Underperform

The Pound US Dollar (GBP/USD) exchange rate weakened sharply on Tuesday as investors reacted to growing instability in UK politics.

At the time of writing, GBP/USD was trading at around $1.3541, down approximately 0.5% from Tuesday’s opening levels.

The Pound (GBP) came under renewed pressure on Tuesday as concerns over the stability of Keir Starmer’s leadership continued to intensify.

Following Labour’s disappointing local election results, reports suggested that increasing numbers of MPs are privately questioning whether Starmer can remain in office.

While the Prime Minister has insisted he intends to stay on, investors were unsettled by speculation that divisions are beginning to emerge within senior ranks of the party.

The uncertainty rattled UK financial markets, triggering another selloff in government debt. Yields on long-term gilts climbed to their highest levels in decades as traders worried that a change in leadership could lead to a shift in fiscal policy.

The US Dollar (USD) strengthened through Tuesday’s session as demand for safe-haven assets picked up once again.

Market sentiment deteriorated after US President Donald Trump warned that the ceasefire between Washington and Tehran was in a precarious position, raising fears that tensions in the Middle East could flare up again.

The ‘Greenback’ then received an additional lift following the latest US inflation release. Data showed consumer price growth accelerated to 3.8% in April, marking the highest reading in nearly three years.

The stronger inflation print reinforced expectations that the Federal Reserve may need to maintain a restrictive monetary policy stance for longer.

Near-Term GBP/USD Forecast: Sterling Vulnerable to Further Political Turmoil?

Looking ahead, movement in the Pound to US Dollar (GBP/USD) exchange rate is likely to remain heavily influenced by political developments in the UK and ongoing tensions in the Middle East.

Sterling may remain under pressure if speculation surrounding Starmer’s position continues to intensify or if calls for a leadership contest gather momentum.

At the same time, the US Dollar could extend its gains if concerns over the Strait of Hormuz worsen or if fresh geopolitical tensions drive investors towards safer assets.

The publication of the latest US producer price index could also influence the pairing later in the week, particularly if rising factory costs reinforce expectations for higher-for-longer US interest rates.

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TAGS: Pound Dollar Forecasts