Historic Labour Defeat Pushes Sterling Pound Toward Another Weekly Loss

The British pound is struggling to regain its footing after a stunning political upset delivered a heavy blow to the UK government, deepening market jitters and steering sterling toward a second consecutive weekly decline.

The pound was down 0.1% on the week, hovering at $1.3483 against the dollar and holding steady at 87.55 pence against the euro. While the moves appear modest, currency analysts say the underlying message from markets is more consequential: political uncertainty is once again casting a shadow over UK assets.

In a result that sent ripples through Westminster, the Green Party secured a sweeping victory in a Manchester constituency long regarded as a Labour bastion for nearly a century. The defeat marks a significant setback for Prime Minister Keir Starmer, whose leadership has come under mounting scrutiny in recent weeks.

The loss arrives amid rising internal dissent and growing calls for Starmer’s resignation, intensifying questions over his political durability. For investors, the result signals potential instability at the heart of government, a factor currency markets are notoriously quick to price in.

Political risk has become an increasingly important variable in sterling valuation models, particularly as traders assess the probability of leadership changes and shifts in fiscal direction.

The pound has long been regarded as one of the G10 currencies most sensitive to domestic political developments. From Brexit turbulence to fiscal policy shocks, sterling’s volatility has often mirrored the mood of Westminster.

Analysts warn that speculation over Starmer’s future, and the possibility of a successor with a more left-leaning economic agenda, is adding pressure. Investors are wary that a shift toward more expansionary fiscal policy could widen borrowing needs and complicate inflation control efforts.

Prediction market platform Polymarket currently indicates a 53% probability that Starmer could step down by June, up sharply from 24% at the start of February. While such platforms do not guarantee outcomes, they reflect the growing unease embedded in market sentiment.

Francesco Pesole, FX strategist at ING, noted that any development weakening the prime minister’s standing tends to weigh negatively on sterling, particularly when it raises uncertainty about fiscal continuity.

Interestingly, while the pound softened, UK government bonds found modest support. The yield on five-year gilts fell 1.4 basis points to 3.703%, nearing its lowest level since September 2024 and marking the strongest monthly performance since October.

The divergence suggests that while currency markets are reacting to political risk, bond investors may be positioning for potential monetary easing, or viewing political turbulence as dampening growth prospects, which could justify lower rates.

Attention now turns to the Bank of England, where Chief Economist Huw Pill is scheduled to participate in an economic panel later today.

Markets broadly expect the central bank to cut interest rates in March, with a second reduction potentially before year-end, according to money market pricing. Should political uncertainty intensify, it could further complicate the Bank’s balancing act between supporting growth and containing inflation.

For now, sterling remains caught between monetary policy expectations and mounting political fragility. With leadership speculation intensifying and fiscal questions looming, the pound’s trajectory may hinge less on macroeconomic data, and more on the unfolding drama within Britain’s governing party.