FX Volatility Accelerates as USD Stabilises and Political Risk Pressures Sterling

Since Monday’s outlook, markets have behaved largely in line with expectations. The US dollar sell-off has stabilised, GBP/USD has entered a corrective phase, and GBP/EUR remains capped near resistance. What we are seeing now is confirmation of consolidation rather than continuation, exactly the phase flagged at the start of the week. 

The recent USD rebound reflects tactical support rather than a structural shift. Improved Federal Reserve credibility following the Kevin Warsh nomination, official discomfort with excessive dollar weakness, positioning unwinds, and a softer tone in equity markets have all contributed to near-term stabilisation. However, the broader backdrop of softer structural USD demand and lingering policy uncertainty remains intact. 

Sterling, meanwhile, continues to hold up in global terms but is becoming increasingly sensitive to domestic developments. Recent price action has reinforced that pound strength has been externally driven, supported primarily by global risk appetite and prior dollar weakness rather than any meaningful improvement in UK fundamentals. 

That distinction has mattered this week. 

Political uncertainty in the UK has begun feeding directly into FX pricing, most visibly in GBP/EUR. Headlines surrounding Prime Minister leadership stability and the fiscal implications of any potential political shift have introduced a domestic risk premium into sterling. The result has been underperformance against the euro despite relatively stable global conditions. 

This creates a layered market dynamic: 

• A tactical window for USD stabilisation
• Rising domestic political sensitivity in GBP
• A stable but passive euro backdrop 

Taken together, this reinforces that FX has moved decisively from trend into consolidation. 

Investment bank forecasts reinforce this narrative. Research from J.P. Morgan projects GBP/USD volatility rather than trend continuation, with the pair, in their opinion, forecast to stabilise around the 1.39 level longer term through 2026. 

Their outlook reflects structural pressures on sterling, including productivity constraints, trade policy risk, and persistent balance deficits, while also recognising that periods of USD weakness can still generate tactical upside in GBP/USD.  

Bottom Line 

The core calls remain intact: 

• USD weakness has paused, not reversed
 • GBP/USD has entered a corrective phase
 • GBP/EUR remains capped and range-bound 

What has changed is depth, not direction. Sterling is now trading with an added layer of political sensitivity, increasing volatility across GBP crosses. 

We are operating in one of the most reactive and policy-driven FX environments seen in several years. Moves are faster, narratives shift quickly, and timing risk has materially increased. 

For businesses with currency exposure, this is no longer a market to approach passively. Structure, flexibility, and active management matter more now than at any point in recent cycles.