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It's time to sell the pound say analysts at Deutsche Bank.
Having backed the currency with a 'long' stance for much of 2026, the investment bank says it is switching strategy and now looks to sell.
"We have turned bearish on sterling as the risk premium around UK fiscal policy has largely disappeared, leaving the pound more exposed to a softer domestic and external backdrop," says a strategy note from the Bank, released on September 22.
It warns that higher energy prices are starting to erode the improvement in the trade balance, reduce fiscal headroom and weigh on foreign gilt inflows.
"We expect sterling to underperform other major currencies, and favour selling against a basket of EUR, USD, CHF, and JPY, says the Deutsche Bank strategy note.
Dovish Bank of England
Bank of England policy is one pillar for the decision: strategists expect the Bank to deliver a series of 'dovish hikes' in keeping with recent history.
"If tightening does materialise, the lesson from the last cycle is to expect 'dovish hikes' accompanied by currency weakness," says Deutsche Bank.
What does that look like in practice? It is where the Bank raises rates but warns markets not to expect any further hikes, which ultimately lowers the forward-looking rates curve.
That movement has tended to be consistent with a softer pound.
Economic Pulse to Fade
The economic pulse could also play its part as Deutsche Bank thinks there's a chance "the recent pattern" of UK data undershooting expectations into year-end.
Britain's economy has tends to start the year off with a spring in its step, quickly losing momentum and crawling to the finish line.
Notably, 2026 hasn't seen any sign of growth slowing, which has kept the pound relatively well supported. The bet at Deutsche Bank is that we should see headwinds emerge.
Those headwinds come in the form of elevated energy costs, a deteriorating trade balance and eroding fiscal headroom via higher market yields.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
A Quiet Budget
Deutsche notes Sterling is "already priced for a quiet Budget."
This is remarkably aligned with Pound Sterling Live's established House View, in which we see the pound staying capped into the budget, but recovering afterwards.
Pound Sterling Live's view is that Burnham will opt for caution and avoid large fiscal giveaways, instead opting for smaller headline-grabbing moves that don't materially alter the course of Britain's finances.
Playing it safe would be enough to allow markets to focus on the economy's relative outperformance in 2026, something that should extend into year-end provided the Budget is a relative non-event.
Implied Volatility Can Pick Up
Implied volatility in sterling is low; in fact, Deutsche Bank says implied volatility has never been this low ahead of a UK budget, and the skew towards sterling puts is also far from its extremes.
What does that mean? It means the 'big money' players aren't buying the FX products that would protect them against a large fall in the pound.
"This removal of the risk premium is consistent with messaging from the new leadership which points towards this year's Budget being a quieter affair than in recent years," says Deutsche Bank.
Going forward, this also means risk premium is ripe for a pickup.
Risks to the sanguine budget view include rising energy bills that run up against Prime Minister Andy Burnham's stated vision of making the cost of living easier for households.
Does he try to deliver on that, in an environment of elevated bond yields, and risk being punished by markets?
It's the one big downside risk to watch, and yesterday's leading article on Pound Sterling Live revealed that Burnham is planning a big tax giveaway.
Expect GBP to be pressured in the run-up to the budget.
