the pound(GBP) has wobbled over the last few days, buffeted by the UK local elections and Monday’s speech by Prime Minister Keir Starmer, who insisted he’s staying in the top job. Markets are worried that uncertainty and the prospect of a more left-leaning government raising spending will strain the country’s delicate finances. As the drama unfolds in London, cable could remain more volatile.
Sterling initially rose as the votes were counted on Friday, and the results showed that Labour’s drubbing in Thursday’s election was not as bad as initially thought. Starmer afterwards insisted he would stay on as Prime Minister, also reassuring markets. But doubts have begun again as rivals in the Labour Party make a concerted push for a leadership change. How that push for fares will likely be pivotal for the pound.
Why Are Markets Concerned About Starmer’s Exit?
Markets are worried that Starmer will resign or be forced out and replaced by a more left-leaning leader who would replace Chancellor Rachel Reeves. The Party base has been frustrated with Starmer, and particularly Reeves, for not taking a more aggressive stance on social policy and for not increasing spending. Reeves had a long career in UK banking and has taken a conservative fiscal stance, seeking to balance spending and reduce the nation’s deficit.
Rivals to Starmer have a series of political gripes with the Prime Minister, including his low popularity. But the issue that most affects the markets is the push for increased spending and higher taxation. Raising the debt to fund social programs would set off deficit hawks, pushing up long-term interest rates and threatening the stability of the financial sector. Some traders worried it could create a repeat of the 2022 “mini-budget” fiasco. If the government increases spending and raises taxes to compensate, the worry is that the added drag on the economy might push Britain into a recession. Both scenarios are negative for the pound (GBP).
What Are the Chances That Starmer Will Resign?
According to Polymarket, participants are putting 66% odds on Starmer not being PM by the end of the year. After insisting he won’t resign, the most likely path is a challenge to his leadership, and there are several ways he could be forced to step down.
According to Labour Party rules, if 20% of MPs call for a leadership challenge, then this could trigger an internal vote to replace the party leader. That means 81 MPs would have to sign on, with backbencher Caherine West saying she’s gathered as many as 40 so far and looking to oust Starmer that way. Leading potential replacements to Starmer include former Deputy Prime Minister Angela Rayner and current Health Secretary Wes Streeting. Another option would be to call for a vote of no-confidence in Parliament. With Labour holding a solid majority, any attempt to oust the PM would require a substantial number of Labour MPs to vote in order to succeed.
How Will the Market React to the Political Situation in the UK?
So far, the pound(GBP) has been in a holding pattern, rising and falling depending on how much risk traders see of Starmer being ousted. If he manages to stay in power, then the market could eventually calm down.
The main issues that could affect currency markets are a surprise resignation of the PM, which could cause the currency to drop. Or a general loss of market confidence in the government, which could raise long-term yields and depress the stock market. That would also likely weigh on the pound(GBP) as well.
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