The Pound-to-US Dollar (GBP/USD) exchange rate earlier slipped toward the 1.3410 area before staging a solid recovery to 1.3460.
At the same time, Goldman Sachs points to notable risks for the pound linked to the local elections scheduled for May.
The bank recommends buying EUR/GBP call options with a 0.8925 strike, implying potential downside in GBP/EUR toward the 1.1200 level. Goldman also advises purchasing GBP/USD put options with a 1.3250 strike, anticipating further pressure on the British currency.
In its latest update, Goldman Sachs emphasizes the political and fiscal risk premium currently embedded in the pound.
The pound came under pressure ahead of the November 2025 budget, and the bank believes that the May local elections could once again trigger a period of heightened turbulence and currency weakness. Heavy losses for the Labour Party would increase the risk of internal leadership challenges to Prime Minister Keir Starmer, adding further uncertainty to the fiscal policy outlook.
Monetary policy is also set to be a key factor in 2026. Markets expect the Bank of England to cut interest rates again during the year, while the European Central Bank is widely seen keeping rates unchanged. This divergence in central bank policy could add further pressure on the pound via widening interest rate differentials.
