The Pound to Dollar (GBP/USD) exchange rate has steadied near 1.34 after suffering heavy losses earlier this month, although Rabobank believes Sterling remains vulnerable as UK political uncertainty continues to weigh on investor sentiment.

GBP/USD traded near 1.3427 on Thursday, recovering modestly after falling towards 1.33 earlier in May amid renewed concerns surrounding Prime Minister Keir Starmer’s leadership.

Rabobank analysts noted that Pound Sterling has been one of the weakest major currencies during May, describing the Pound as “the third worst performing G10 currency” over the past month.

The bank believes politics has become the dominant driver behind recent Sterling weakness.

“Most commentators would agree that the poor performance of the pound in May can be linked to political uncertainty sparked by the local elections at the start of the month.”

Rabobank warned that uncertainty may continue throughout the summer given speculation surrounding possible Labour leadership changes.

“It would appear very likely that political uncertainty will drag on through the summer.”

The bank said investors remain concerned that the UK could face another prolonged period of unstable government after several years of political turbulence.

“From the point of view of investors who desire clear policy direction, the Labour party has behaved as an unruly coalition.”

Rabobank also cautioned that markets may become increasingly uneasy over fiscal risks if Labour shifts further to the left politically.

“The favourites to win any Labour leadership challenge are Burnham and Rayner, both representing the soft left of the party.”

While Andy Burnham has attempted to reassure investors by backing existing fiscal rules, Rabobank argued markets may still worry about higher taxes and borrowing.

“While Burnham has recently allayed fears about unfunded spending with the reassurance that he will stick to the current Chancellor’s fiscal rules, this implies the potential for an even higher tax burden to support spending plans.”

The bank also believes ongoing Middle East tensions could continue supporting the US Dollar through safe-haven demand.

“We see scope for further dips in cable back to the GBP/USD1.33 level on a 1-month view.”

Rabobank expects UK political uncertainty to remain an important drag on Sterling during the second half of 2026.

Other Banks More Constructive on Sterling Outlook

Rabobank’s cautious Pound Sterling outlook contrasts with several other major investment banks.

RBC Capital Markets forecasts GBP/USD rising back towards 1.40 during 2027, while Westpac and Scotiabank also expect medium-term gains for Sterling. Natixis sees GBP/USD climbing gradually towards 1.39 by late 2027.

However, Citi and Danske Bank remain more cautious, warning that slowing UK growth and political instability could keep Sterling under pressure.

Rabobank believes Pound Sterling could remain vulnerable in coming months as political uncertainty and safe-haven US Dollar demand continue to overshadow support from UK interest-rate expectations.