Sterling has come under pressure this morning amid growing political uncertainty around Keir Starmer's future as Prime Minister.
Last week’s heavy Labour losses in the local elections have triggered a wave of public dissent within the party, with more than 75 MPs now calling for his resignation. At a cabinet meeting this morning, Starmer acknowledged the scale of the defeat and accepted personal responsibility but made clear he intends to "get on with governing" despite what he described as a "destabilising" 48 hours. No formal leadership challenge has been triggered so far, but markets are watching developments closely.
Investors are concerned that if Starmer is forced out that he would be replaced by a more left-leaning Labour leader who might push for more spending (by raising public borrowing and taxes further) at a time when Britain's finances are already stretched. UK borrowing costs are already the highest in the G7 and have risen the most since the Iran war, so a further increase will add even more pressure onto our public finances. These fears are being played out this morning in the markets with long-dated gilt yields surging to their highest levels in nearly 30 years, UK banking stocks down (over fears of potential banking surcharge rises) and Sterling losses.
As a result, GBP/USD has fallen around 1% from yesterday's high and currently trades around a 12-day low. GBP/EUR has dropped close to a cent from yesterday's peak and sits around a 2.5-week low.
The direction from here will hinge on how quickly the political situation resolves and/or whether things will escalate. Any signs of stabilisation could see the Pound recover some of its losses, but a prolonged period of uncertainty and/or a potential leadership change, could see further losses.
