Keir Starmer’s position has been under threat for quite some time, but the Labour Party’s defeat in the local elections has only intensified speculation about a possible replacement of the prime minister. Rising political risks are weighing on the GBP/USD pair. Let’s discuss the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The number of Labour Party members dissatisfied with Starmer is growing.
- There are statistical anomalies in GDP trends.
- Bond yields have surged to 1998 highs.
- Short trades can be considered as long as GBP/USD quotes remain below 1.355.
Weekly Fundamental Forecast for Pound Sterling
When political developments shift from an abstract risk to a tangible threat, the currency stands to suffer. The pound remained fairly stable following Labour’s defeat in the local elections. Societe Generale argued that this outcome was already priced into the GBP/USD rate. However, when the number of ruling party representatives calling for Keir Starmer’s resignation exceeded 80, the pound finally began to respond to political risks.
The pound showed muted reaction to the conflict in the Middle East and remained among the top three G10 currencies for an extended period, alongside the Norwegian krone and the Australian dollar, driven by expectations of aggressive monetary tightening by the BoE. The futures market predicted up to three rate hikes in 2026, which spurred British bond yields and triggered a rally in GBP/USD quotes.
GBP/USD Rate and UK Gilt Yield
Source: Bloomberg.
However, rising bond yields are not solely the result of expected monetary tightening. In part, they reflect political uncertainty. Growing discontent with Keir Starmer within the Labour Party has allowed Polymarket to predict, with a 66% probability, that he will step down as prime minister by the end of 2026. Just a couple of days ago, that figure stood at 48%.
As a result, yields on 30-year British bonds have soared to their highest levels since 1998 on fears that a new prime minister will abandon the principles of fiscal consolidation and introduce additional stimulus measures. This would contrast with the Bank of England’s tightening of monetary policy. A similar scenario unfolded in the fall of 2022. At that time, turmoil in financial markets forced Liz Truss’s government to resign, and the GBP/USD pair plummeted to a record low.
Neither expectations of a rate hike nor optimistic forecasts for the UK’s first-quarter GDP are helping the pound. Since the pandemic, the economy has exhibited a distinct pattern: it grows strongly in the first half of the year and slows down in the second.
UK GDP Growth
Source: Bloomberg.
Such twists and turns have fueled rumors that the Office for National Statistics is making a titanic effort to bring GDP figures within acceptable levels. Combined with the BoE hawks’ intention to remain cautious amid uncertainty in the Middle East, this suggests the GBP/USD pair is losing its key advantages and its decline seems inevitable.
Will Keir Starmer be able to hold on to the prime minister’s seat? The pound’s performance hinges on the answer to this question. Although a change in leadership risks causing the pound to plummet, as is often the case, stabilization of the country’s political situation could strengthen the UK currency in the medium term.
Weekly Trading Plan for GBP/USD
If the GBP/USD pair fails to rise above 1.355 in the near term, short positions can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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