UK assets markets starting to feel the heat
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.
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.
How firms align with this view
Aligned with the desk view
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.
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.
Risks to this view
Upside risk: rapid resolution of Labour leadership contest with a pro-business candidate could stem gilt selloff and boost GBP. Downside risk: extended leadership battle or radical policy promises could trigger further pound depreciation and yield spikes.
Sources & References
How we cover this story