Key Moments
- Commerzbank projects EUR/GBP moving toward 0.89 in the coming weeks from levels near 0.86.
- The bank expects the BoE may raise rates once before market focus returns to potential cuts in the second half of the year.
- Current GBP strength is not expected to reappear until 2027, despite a forecast recovery beginning in the second half of the year.
Commerzbank Flags Limits to Pound’s Outperformance
Commerzbank strategist Michael Pfister sees the recent advance in the British Pound as vulnerable, citing what he describes as overly aggressive expectations for Bank of England policy and a renewed build-up of political risk. The bank anticipates that EUR/GBP will climb toward 0.89 in the coming weeks, even as it expects GBP/USD to grind higher over a longer horizon. In Commerzbank’s view, the Pound’s current valuation is unlikely to be seen again until 2027.
Drivers Behind Sterling’s Recent Strength
Pfister notes that the Pound has stood out among major currencies since the onset of the war.
“Of the G10 currencies, the pound is one of only five to have posted a positive performance since the start of the war, alongside the four major commodity exporters. This surprising performance is based on two factors: the Bank of England (BoE) is expected to respond very decisively, and the political risk premium was priced out in early March. However, we doubt the sustainability of these factors, which is why we expect the pound to weaken in the coming months.”
Market Repricing of BoE Policy
According to Pfister, the reshaping of interest-rate expectations has been a key catalyst for the Pound.
“Instead of anticipating two rate cuts by the end of the year, the market has at times priced in more than three rate hikes. This massive correction naturally gave the pound a strong boost.”
However, he questions whether the central bank will ultimately match such aggressive expectations.
“We doubt that the Bank of England will meet these expectations.”
Pfister outlines a more moderate policy path ahead.
“The BoE may raise rates once, but the focus is likely to shift back to rate cuts in the second half of the year. If the market moves in this direction as well, the GBP gains driven by ambitious rate expectations will likely be priced out again.”
Political Risk and EUR/GBP Outlook
Commerzbank also factors the domestic political backdrop into its currency view, arguing that renewed uncertainty could weigh further on the Pound in the near term.
“Given the ambitious BoE expectations and the ongoing political risks, we believe there is a strong possibility that the pound will come under pressure again in the coming weeks. Although EUR/GBP is now trading close to the 0.86 level again, if the local elections yield a poor result for Labour, the exchange rate is likely to trend towards 0.89.”
| Currency Pair / Factor | Current/Recent Context | Commerzbank View |
|---|---|---|
| EUR/GBP | Trading close to 0.86 | Seen rising toward 0.89 in the coming weeks |
| GBP/USD | Benefited from BoE repricing | Expected to appreciate gradually in the long term |
| BoE Policy | Market at times priced more than three hikes instead of two cuts | BoE may hike once, then shift focus back to potential cuts in the second half of the year |
Longer-Term Recovery Timeline
While near-term risks dominate Commerzbank’s forecast, Pfister does not see political drag as a permanent feature.
“Nevertheless, political risks are unlikely to persist indefinitely, so we expect a recovery to begin in the second half of the year. But the current level is unlikely to be reached again until 2027.”
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