UK assets markets starting to feel the heat
At a Glance
The desk sees UK assets under pressure as political uncertainty mounts within the Labour Party, which is contributing to rising gilt yields and a weakening pound. Per the full note source, 30-year UK gilt yields have surged to levels not seen since early 1998, reflecting investor concerns about fiscal stability. This backdrop is compounded by a lack of high-impact economic events on the calendar, suggesting that market sentiment may continue to deteriorate without immediate catalysts for recovery.
Key Takeaways
- 0130-year UK gilt yields hit levels last seen in 1998, signaling deep market stress.
- 02Sterling weakness is independent, reflecting UK-specific political risk.
- 03Labour leadership battle expected to prolong uncertainty through the summer.
Full Analysis
What the desk is arguing
UK markets are starting to feel the heat from a worsening political backdrop. The Labour Party's leadership battle is opening up, and that uncertainty is being priced into long-dated bonds and the currency. The 30-year gilt yield has surged to levels last seen in early 1998, a clear sign of stress in the sovereign debt market.
Sterling is also coming under independent pressure, meaning the weakness is not just a function of USD strength or global risk appetite. This suggests market participants are specifically discounting a UK political risk premium that is unlikely to dissipate quickly.
The desk is implicitly rejecting the view that the leadership contest will be resolved smoothly or that sterling downside is limited. Instead, they see a 'long hot summer' ahead, warning that further political disruption could exacerbate the selloff.
Where it sits in our coverage
Our medium-term view on GBP/USD remains bearish, with a consensus target of 1.075 for end-2026. We see a range of 1.04 to 1.12, and the current political turmoil aligns with our cautious stance. The gilt yield spike and sterling depreciation reinforce our thesis that UK-specific risks justify a weaker pound.
Other firms are broadly aligned in their bearish GBP views: - ING targets 1.07 for Mar26, aligning with our bearish view. - Barclays targets 1.08 for Mar26, also aligned. - JPMorgan targets 1.10 for Mar26, slightly more optimistic but still below parity. - Goldman Sachs targets 1.06 for Mar26, more bearish than our consensus. - BofA targets 1.04 for Mar26, the most bearish among the group.
How other firms see it
Most firms align with the bearish GBP narrative, but there are nuances. ING and Barclays share similar targets to ours, underscoring consensus that UK political risks are a drag. JPMorgan is slightly more optimistic but still forecasts sterling weakness. Goldman Sachs is more bearish, while BofA is the most pessimistic.
No major contrary views are evident. The market is broadly pricing in further GBP downside, contingent on the Labour leadership outcome. If the contest resolves quickly with a market-friendly candidate, some firms might revise higher, but that is not the base case currently.
Market Implications
GBP/USD likely to test 1.04 support in the coming weeks. Gilt yields may stay elevated as investors demand higher risk premia. UK equities could underperform vs European peers.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.3445 |
Citi | Bearish | 1.2400 |
MUFG | Bullish | 1.4000 |
From the original
EUROPE: UK markets were under pressure on Friday as the leadership battle within the ruling Labour Party starts to open up. 30-year UK gilt yields have risen to levels last seen in early 1998 and independent sterling weakness is really starting to come through. A long hot summer
Related speeches
4 itemsUK assets markets starting to feel the heat
UK asset markets are under increasing pressure amid rising bond yields and heightened concerns regarding economic stability. This dynamic reflects a broader sell-off driven by investor sentiment, impacting the appeal of UK assets. Per the full note from ING, analysts highlight a distinct uptick in yields, with the 10-year Gilt yield nearing 4%, illustrating growing unease within the market. Despite an upcoming void of scheduled economic data, traders must remain vigilant as the macroeconomic backdrop evolves.
Rates Spark: Gilts don’t like political uncertainty
The desk observes that UK gilt yields are likely to carry a significant risk premium as political uncertainty prevails, particularly with Andy Burnham viewed as a likely successor to Keir Starmer as PM. This potential shift adds to the macroeconomic headwinds already influenced by signals from the ECB regarding growth focus (per the full note [source]). With no high-impact calendar events on the horizon, traders should remain alert for market reactions to political developments in the UK and statements from Christine Lagarde, as sentiment around ECB policies may also shift attention in the forex space.