One of the key risks for Sterling lies in the potential for a more dovish pivot from the BoE, which could accelerate interest rate cuts. The Pound has benefited from its yield advantage under the carry trade dynamic—where investors favor higher-yielding currencies—but a faster pace of rate cuts could erode this edge. That said, analysts believe inflationary pressures within the UK remain strong enough to limit the extent of monetary easing, preserving some of the Pound’s carry appeal. Morgan Stanley maintains that dips in GBP may present buying opportunities, and if EUR/USD reaches 1.20 as forecasted, GBP/USD could trade near 1.40.

The upcoming release of UK inflation data will be critical for shaping near-term sentiment. April’s Consumer Price Index (CPI) is expected to show rising inflation, with core CPI seen increasing from 3.4% to 3.6%, and headline CPI from 2.6% to 3.3%. A hotter-than-expected print could dampen expectations of further BoE cuts, providing a short-term boost to the GBP/EUR pair. Meanwhile, the Eurozone remains relatively quiet on the data front, leaving the EUR to be driven by broader market trends and USD performance. With the U.S. Dollar under pressure following a recent credit downgrade, the Euro could find continued support despite weak German economic indicators.

Despite falling German producer price index (PPI) data, which posted its sharpest drop since October 2024, the Euro held steady on Tuesday. The single currency’s strength was largely tied to weakness in the Dollar, rather than domestic resilience. On the other hand, the Pound managed to hold its ground against most peers, buoyed by positive headlines surrounding a new UK-EU trade agreement. The deal, which simplifies checks on agri-food exports, is expected to add £9 billion to the UK economy. BoE policymaker Huw Pill also lent some support to Sterling by questioning the pace of current rate cuts, suggesting the central bank’s easing cycle may slow.

However, despite robust inflation data, Sterling is showing signs of investor caution. The GBP fell against most major currencies even after inflation readings exceeded expectations across various sectors—from services to housing. This suggests mounting concerns that the UK economy may be sliding into stagflation, where high inflation coincides with stagnant growth. In response, the bond market has already adjusted, with the UK 10-year yield jumping to 4.77%. Normally, rising yields support a stronger currency, but the Pound’s recent decoupling signals deeper unease among investors.

The persistence of strong services inflation, which rose to 5.4% in April from 5.0% in March, further complicates the outlook. Since services inflation is a key driver of overall price stability, its upward trend could force the BoE to pause rate cuts sooner than expected. This makes it unlikely that the Bank can proceed with further monetary easing without risking runaway inflation. With the economy at risk of entering a stagflationary phase, and political pressure mounting over rising borrowing costs, the Pound’s near-term path remains uncertain—caught between stubborn inflation and slowing growth.