Sterling’s Rebound Is Fragile: What Could Break It Again

Over the last several trading sessions, sterling has managed a modest rebound after last week’s weakness. GBP/USD has pushed up above recent lows, and pound-euro pairs are holding up. But for many market watchers, this rally feels more like a breath before what could be another wave of volatility, rather than a sustained upswing. What looks like a recovery could easily unravel. Here’s what to watch, and what you and your clients need to be ready for.

What’s Underpinning The Recent Strength

The pound’s recent gains are being driven by several encouraging factors:

• The Bank of England (BoE) holding rates at current levels, coupled with signals that quantitative tightening (QT) - selling off government bonds - is being scaled back. These steps ease some pressure on gilt yields and help reduce some of the risk premium investors have built in.

• Some upbeat economic data (retail sales, for example) has surprised on the upside, offering temporary relief in sentiment.

• A slightly softer US dollar during periods when US Federal Reserve signals have leaned toward patience, giving a modest tailwind for sterling in USD pairs.

These dynamics have helped mend some of the sharp losses sterling suffered in recent weeks. But the question many are asking: how durable is this rebound?

Risks That Could Break It Again

The rebound is exposed to several major tailwinds working in the opposite direction.

Here are the key risks:

1. Fiscal strain and borrowing surprises

UK public borrowing has come in significantly above forecasts, adding pressure to the government’s ability to meet its fiscal targets. When borrowing is higher than expected, markets demand higher yields to compensate for risk, which tends to weigh on sterling. Upcoming budget decisions may force tax rises or cuts in spending, both of which carry political and market risk.

2. Persistent inflation and weakening labour markets

Although some consumer data is holding up, inflation remains stubbornly above target. Wage pressures, especially in services, and rising costs in essentials keep inflation risk alive. If the labour market weakens further, through layoffs, slower hiring, or wage stagnation, it could shift the BoE’s posture. If markets begin to believe inflation will continue rising, the BoE may need to keep rates higher for longer than expected, which complicates the outlook for sterling.

3. Global dollar strength and external shocks

Sterling doesn’t move in a vacuum. The US dollar’s path, driven by Fed decisions, safe-haven demand, or geopolitical risk, is a counterbalance. If the Fed signals a hawkish tilt or global risk aversion increases (say via a geopolitical event or shocking economic data), the dollar can strengthen sharply, putting downward pressure on GBP.

4. Error in UK policy communication or loss of confidence

Market sentiment is fragile. When fiscal or budget guidance from the government is unclear, contradictory, or signals loosening discipline, confidence drains quickly. In past episodes, such as the 2022 mini-budget, confidence collapsed, gilt yields exploded upward, and the pound fell sharply. Even the perception of insufficient discipline can provoke outsized reactions from bond and FX markets.

What This Means For Clients & Partners

For high-net-worth clients considering property purchases abroad, wealth transfers, or large investments denominated in euros or dollars, the risk isn’t just “How much sterling moves” but when it moves. A 2-3% shift in GBP/USD or GBP/EUR on a transaction worth several million pounds can mean tens or even hundreds of thousands more or less. Timing and strategy matter.

For corporates with overseas suppliers, import costs, or foreign currency liabilities, instability in sterling means forecasting becomes harder. Margins are squeezed when GBP weakens, especially if costs are locked in foreign currency. Also, large tax or fiscal shifts may affect costs, regulation, or inflation.

For referral partners - lawyers, accountants, real estate advisers - this is an opportunity to bring FX risk into your advisory conversations. Clients often underestimate how volatile sterling can be when investor confidence is tested. Advising clients to think ahead: whether that means locking in exchange rates with forward contracts, building flexibility into payment timings, or ensuring budgets and forecasts include sensitivity to currency swings.

Strategic Advice: How to Prepare

Here are some practical steps to consider now:

• Use forward contracts to lock in rates ahead of expected currency-exposed transactions.

• Build scenario plans, mapping out best & worst case FX movement that factor in fiscal disappointments, inflation surprises, or external shocks.

• Time the large payments or purchases if possible, when data or policy signals suggest more favourability.

• Stay very close to policy and government communication: budget announcements, fiscal watchdog reports, BoE speeches. Sometimes what’s said (or not said) moves markets more than the data.

Sterling’s rebound may offer a short reprieve, but the landscape around it remains risky. For clients, partners, and advisers alike, the goal isn’t to predict perfectly - it’s to protect value and maintain flexibility. Because in times like this, that’s what separates those who thrive from those who are left exposed.