Key Takeaways:
The British pound rallied more than 0.6% against the dollar on Monday, staging a sharp recovery from last week’s five-week lows as political turmoil in the UK showed signs of easing. The move was further supported by a surprise upgrade to the UK’s growth forecast by the International Monetary Fund and hawkish commentary from a Bank of England official, providing a trifecta of positive news for sterling bulls.
"The calming of the political waters was the primary driver, but the IMF upgrade provided a fundamental reason to buy back into the pound," said Jane Foley, head of FX strategy at Rabobank. "The market had priced in a significant amount of political risk, and we are seeing that unwind."
The pound’s recovery was broad-based, with the currency also gaining 0.4% against the euro to trade at €1.15063. The rally in sterling was accompanied by a modest retreat in UK government bond (gilt) yields, which had surged to their highest levels in nearly three decades last week amid fears of a leadership challenge to Prime Minister Keir Starmer. The UK economy's stronger-than-expected performance, with a 0.6% expansion in the first quarter of 2026 and a 0.3% rise in March GDP, also helped to underpin the currency.
The sharp reversal suggests that the recent selloff in sterling, which saw it hit a five-week low against the euro, may be exhausted. However, the political situation in the UK remains a key focus for investors, with any renewed instability likely to weigh on the pound. Upcoming UK inflation and employment data will also be closely watched for clues on the Bank of England's future interest rate path.
Looking ahead, the focus for the euro will be on the Eurozone’s preliminary PMI releases for May. Any signs of weakness in the private sector could soften sentiment towards the single currency. In the UK, any further signs of political instability could inject fresh volatility into sterling. The combination of these factors suggests that while the pound has found some relief, the path ahead may still be choppy.
