The Pound to Dollar (GBP/USD) exchange rate retreated towards 1.3380 after failing to hold gains above the 1.34 level, with Sterling undermined by a stronger US Dollar and renewed concerns surrounding UK political and fiscal risks.

ING notes that the global bond-market sell-off has become an important negative for the Pound, particularly as investors reassess exposure to economies with widening fiscal pressures.

The bank considers that recent UK political developments have increased uncertainty surrounding fiscal policy credibility and could trigger a higher Sterling risk premium.

“During this period, international investors may want to avoid UK exposure, and at its extreme, another 3-4% in risk premium could be priced into sterling.”

ING also notes that rising US Treasury yields continue to support the Dollar more broadly as markets scale back expectations for Federal Reserve rate cuts.

That combination leaves GBP/USD vulnerable in the short term, especially if global risk appetite deteriorates further.

The bank expects support around the 1.3250–1.3300 area to come under increasing focus if bond-market volatility persists.

At the same time, ING still considers Sterling relatively better positioned against the Euro given ongoing structural growth concerns within the eurozone.

Near-term direction will depend heavily on global bond markets, Federal Reserve expectations and whether UK political tensions continue to intensify.

For now, ING considers that the balance of risks remains tilted towards further GBP/USD weakness.