Sterling Faces Increasing Pressure: Why Deutsche Bank Recommends Selling the Pound

The pound sterling has entered 2025 on a shaky footing, with Deutsche Bank now issuing a recommendation to sell the currency.

Following a relatively stable 2024, during which sterling managed to keep pace with the US dollar, the new year has brought a series of challenges that signal a potential downward trajectory. The bank suggests shorting the pound against a basket of major currencies, including the euro, US dollar, Japanese yen, and Swiss franc.

This report explores the factors driving Deutsche Bank’s bearish outlook, analyzes the broader market implications, and considers the potential paths for sterling in the months ahead.

Key Drivers Behind Deutsche Bank’s Recommendation

Deutsche Bank has identified several critical factors undermining the pound’s recent stability and long-term outlook:

Deteriorating Yield Advantage. The pound’s appeal in carry trades has diminished as the yield advantage it once enjoyed erodes. Volatility-adjusted carry, which measures the attractiveness of a currency in carry trades relative to its volatility, no longer supports sterling.

Weakening Current Account Dynamics. The UK’s current account deficit, a long-standing vulnerability for sterling, had shown signs of improvement in recent years. However, that progress has stalled, removing a key source of support for the currency.

Reliance on Carry Trade Inflows. Sterling’s recent strength was heavily reliant on carry trade inflows. With the Bank of England potentially signaling a rate-cutting cycle, these inflows could reverse rapidly, exacerbating downward pressure on the currency.

Overextended Positioning. Leveraged funds remain relatively long on sterling, leaving the currency vulnerable to a sharp correction if sentiment turns bearish.

Weak Economic Data. Recent UK economic indicators have underperformed expectations, casting doubt on the resilience of the domestic economy and amplifying concerns about future growth prospects.

Shifts in Sterling Correlations with Yields

Deutsche Bank has flagged a worrying decoupling of sterling’s performance from UK yields. Historically, the pound has moved in tandem with yields, reflecting the currency’s sensitivity to interest rate differentials. However, recent market behavior suggests that this relationship is breaking down.

The divergence mirrors the pattern seen immediately after the UK budget announcement in November 2024, when sterling declined even as yields rose. This reversal in correlation underscores the fragility of sterling’s position and raises questions about the sustainability of any near-term recovery.

The Role of the Bank of England

Market expectations for the Bank of England’s monetary policy have shifted significantly. While the current pricing reflects only 47 basis points of easing in 2025, Deutsche Bank warns that this may be too conservative.

The possibility of a rate cut as early as February—currently assigned a 65 percent probability—has further fueled concerns about sterling’s prospects. Should the Bank of England adopt a more dovish tone and signal additional easing, the pound’s decline could accelerate.

Technical and Psychological Levels for Sterling

Sterling’s trade-weighted index remains just over two percent off its post-Brexit highs, but Deutsche Bank sees considerable downside potential.

Key levels to watch include the 2023 low of 1.2000 against the US dollar. A break below this threshold could open the door to a test of the 2022 low of 1.0382, a level not seen since the immediate aftermath of the Brexit vote.

Implications for Markets and Investors

The weakening pound has implications across asset classes and geographies:

Equities. A weaker pound could benefit UK exporters by making their goods and services more competitive in international markets. However, this may not offset the broader economic challenges facing domestic-focused sectors.

Fixed Income. Expectations of further rate cuts could drive UK bond yields lower, increasing demand for gilts but potentially dampening the attractiveness of sterling-denominated fixed-income assets for foreign investors.

Global Currencies. A significant decline in sterling could bolster demand for safe-haven currencies such as the US dollar, Swiss franc, and Japanese yen, while amplifying volatility in global currency markets.

Strategic Considerations for Investors

For investors navigating sterling’s uncertain trajectory, several strategies may prove effective:

Diversification. Diversifying currency exposure across major economies can mitigate risks associated with sterling’s potential decline.

Hedging. Leveraging instruments such as currency options and forwards can protect against adverse moves in the pound.

Focus on Exporters. UK companies with significant overseas revenue may benefit from a weaker pound, presenting opportunities in equities with global exposure.

Monitor Central Bank Signals. Close attention to Bank of England communications and economic data releases will be critical in assessing the likelihood and extent of policy easing.

Conclusion

Sterling faces a confluence of pressures that threaten its near-term stability and long-term trajectory. Deutsche Bank’s recommendation to sell the pound reflects mounting concerns over deteriorating yield advantages, stalled current account improvements, and weakening economic fundamentals.

While the Bank of England’s policy decisions will play a pivotal role in shaping sterling’s outlook, broader market dynamics, including shifts in investor sentiment and global risk appetite, will also influence the currency’s path.

For market participants, understanding these interconnected factors and maintaining a flexible approach to currency risk management will be essential in navigating sterling’s uncertain future. Whether the pound can stabilize or continues its downward slide will depend on a delicate balance of domestic resilience and global economic forces.