The pound is in focus this week amid the political drama in the UK that is overshadowing expected data releases. What isn’t getting as much attention is the rise in specific commodities that are also tied to UK market performance. Commodity currencies overall are benefitting, from an improving economic outlook for China, but the effect on the pound is not being noticed, yet.
Despite the political turmoil and rising gilt yields, the UK stock market has risen this week, buoyed by global sentiment and in particular by mining companies. Part of this can be explained by the FTSE 100 having a large weighting of international firms. But for Forex traders, the particularly relevant aspect is how rising equities can reverse expected weakness in the pound.
Will Starmer Eventually Resign?
Pressure has continued to mount on the embattled Prime Minster of the United Kingdom, with four Cabinet secretaries so far resigning to put pressure on him to announce an orderly transition. The pressure on Kier Starmer to resign comes at an awkward procedural moment as King Charles will deliver a speech on the government’s priorities on Wednesday’s opening of Parliament. The Labour base is looking to leverage the electoral drubbing last week to push the government into a new set of more populist priorities.
The market is worried that a more left-leaning Prime Minister will undo the meagre confidence that Chancellor Rachel Reeves has built in the UK economy. However, political strategists suggests that even if there is a change in Prime Minister, the political uncertainty might not abate. Starmer has historically low approval ratings not because of him personally, but policies of his government, specifically on immigration. That has propelled the vote for Reform. Putting in a new PM who will shift further left as the last election shows a popular shift to the right won’t fix the popularity problem. If there is a new Prime Minister, the political crisis would likely crop back up soon after.
Markets Wary of the Results
UK long-term gilts are at the highest they’ve been since 1998, exceeding the levels that provoked the “mini-budget” crisis four years ago. Higher yields undermine the financial sector, depressing the market and causing currency outflows. The high yields suggest the market is pricing in a very likely chance that Starmer will either resign or accede to the pressure. The subsequent political uncertainty will likely continue to weigh on the pound.
So, if Starmer does manage to hold on through the turbulence, the pound could rebound. One element that might affect the outcome is Thursday’s GDP release. If it exceeds expectations, it might be an argument for continuing Starmer’s policies. But if disappoints, it might be another pressure point against the current administration.
What the Market is Looking For
UK Q1 GDP is anticipated to accelerate to 0.6% from 0.1% in the fourth quarter. This is despite March monthly GDP forecast to slip into the red at -0.2% compared to 0.5% in February. Analysts suggest that higher taxes and increased borrowing costs from government deficit spending have weighed on the economy.
Meanwhile, UK mining companies have seen solid gains as copper prices are at a record high, and silver is rising amid high demand for AI infrastructure. These capital inflows have dampened some of the weakness in the pound. That means the currency is at higher risk of a decline if market sentiment changes.
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