Pound-Euro Fall Confirms Market is Nervous Over Starmer

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Above: P.M. Keir Starmer defends his budget in a speech delivered Monday. Picture by Simon Dawson / No 10 Downing Street.

"Change in both prime minister and chancellor remains one of the key threats to sterling this year" - ING.

Pound-euro falls back from 4-month highs at 1.16, reaching 1.1515 in Thursday trade.

The pair is the best barometer we have for UK-specific risks, confirming suspicions that traders are nervous about renewed political concerns in the UK, where the Prime Minister Keir Starmer is back under pressure.

"We may be reading a little too much into sterling price action, but it did seem to sell off yesterday afternoon after PM Keir Starmer faced a confrontation from his own Labour MPs in the House of
Commons," says Chris Turner, lead FX analyst at ING Bank.

Starmer is facing renewed pressure from Labour Party peers over what he knew about Peter Mandelson when he appointed him to the position of U.S. Ambassador. Mandelson had close ties to convicted paedophile and financier Jeffrey Epstein.

An extraordinary session in parliament on Wednesday afternoon and evening saw Starmer concede he knew of controversial details.

GBP steadily fell through this session, with follow-through selling seen on Thursday. (Get a no-obligation exchange rate quote here).

Above: GBP/EUR started falling during Tuesday's afternoon parliamentary session that started with Prime Minister's Questions.

"The prospect of a change in both prime minister and chancellor remains one of the key threats to sterling this year," says Turner.

Angela Rayner, now the leading contender to replace Starmer, forced the Prime Minister into another u-turn by forcing him to release documents relating to Mandelson's appointment.

"Some would argue that Angela Rayner effectively kicked off her leadership bid by calling for greater scrutiny of the vetting process used for last year’s appointment of Peter Mandelson as UK ambassador to the US," says Turner.

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Polymarket shows 65% odds Starmer is replaced by year-end.

Markets fear Starmer will need to appease left wing of his party, resulting in a looser commitment to UK fiscal rules while his replacement in the event of an internal party coup will be even more lax on UK spending and debt.

"A replacement of the PM by Rayner would mark a clear shift to the left and add further doubts to the UK fiscal position," explains Turner.

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UK bond market movements add to evidence that investors are tetchy over the evolving situation.

"It's worth keeping a closer eye on the UK with PM Starmer under considerable domestic pressure given the handling of the Peter Mandelson story. 10yr Gilts were up +2.9bps yesterday bucking the international trend as concerns grew that he could be replaced. So one to watch," says Jim Reid, strategist at Deutsche Bank.

However, it will be difficult to displace the Prime Minister as an MP wishing to challenge Starmer for the leadership must be supported by 20% of Labour MPs (80 or 81 out of 404 total MPs at present).

If this threshold is reached, a leadership election is triggered, with the incumbent leader automatically on the ballot paper.

There's a strong likelihood that nervousness recedes as traders are reminded there's an incredibly high bar to replacing Starmer, which suggests GBP/EUR weakness might be limited.