Pound-Euro Slips to Fresh Two-year Low on Political Uncertainty
- Written by: Gary Howes
Political jitters surrounding Prime Minister Keir Starmer are delaying a rebound in the pound to euro exchange rate, just as peak negativity looked set to pass.
What is happening
Reports suggest Prime Minister Keir Starmer faces a leadership challenge. Supporters accuse Wes Streeting and Shabana Mahmood of being on “leadership manoeuvres”. Read more.
What it means for the pound
Uncertainty is the enemy of pound sterling. The pound has struggled to regain composure after a multi-week selloff triggered by disappointing data and rumours of significant tax hikes due in the November 26 budget.
The pound was already under pressure:disinflation is gaining traction, reinforcing bets that the Bank of England can cut rates further and faster. That dynamic typically drags on UK bond yields and dampens the pound’s appeal.
Compare Currency Exchange Rates
Find out how much you could save on your international transfer
Estimated saving compared to high street banks:
£25.00
Free • No obligation • Takes 2 minutes
The pound dislikes political uncertainty. The Brexit years offered a clear lesson: prolonged leadership questions and shifting policy agendas raised risk premia and pushed investors to demand a discount to hold GBP.
A change to a more left-leaning leadership replacing Prime Minister Starmer and Chancellor Rachel Reeves would likely be seen as borrowing more to fund higher spending, a mix markets typically penalise with higher gilt yields and a weaker pound.
GBP/EUR fell to a new two-year low at 1.1311 on Wednesday as traders grappled with renewed political uncertainty. Momentum remains negative, and without political calm, fresh lows are possible.
Signs of exhaustion were emerging in the selloff, but the renewed political tension ensures the pressure persists.
"Political noise could push EUR/GBP to new highs for the year in the 0.8870/8900 area," says Chris Turner, head of FX research at ING Bank.
EUR/GB" at 0.8870/8900 equates to GBP/EUR falling to 1.1236/1.1273.
Compare Currency Exchange Rates
Find out how much you could save on your international transfer
Estimated saving compared to high street banks:
£25.00
Free • No obligation • Takes 2 minutes
Deeper dive
Allies of Keir Starmer sought to quell speculation of a challenge from Health Secretary Wes Streeting, according to people familiar with the matter. Starmer’s team accused Streeting of plotting to replace him, though a spokesperson for Streeting called the claims "categorically untrue".
The leadership noise comes as the government prepares for a tough budget on November 26. Chancellor Rachel Reeves has warned the statement will be challenging and could trigger more party friction.
We have been here before
In July, Pound Sterling briefly wobbled amidst fears Starmer would replace Chancellor Rachel Reeves. Then, in September, Andy Burnham said he was considering challenging Starmer for the premiership. Review that episode.
What analysts say
“Even though a general election would still be a long way away, a Labour party under new leadership that deprioritises fiscal consolidation under pressure from Reform could put the UK back on bond vigilantes’ radar – for all the wrong reasons.
The Budget is fraught with risk. The maximum moment of danger for the PM and his Chancellor could come next year, perhaps after local elections in May. A poor performance then could see both at risk of being ousted by their own party.
Labour could be pushed away from the fiscally conservative approach that markets prefer.”
– Investec
Bottom line: Pound sterling’s 2025 selloff against the euro has been given fresh impetus by renewed political tensions. Until leadership rumours fade and the budget reassures on fiscal discipline, GBP/EUR upside looks capped while risks remain tilted lower.
