Pound-to-Euro Rate's Upside Case from Gorton & Denton

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Picture by Lauren Hurley / No 10 Downing Street

Keir Starmer and Labour could actually win this seat.

Pound sterling is poised to end the week higher against the euro, dollar and other currencies if Labour surprises and wins the Denton and Gorton by-election.

Reams of commentary have been written telling how the pound faces downside risks into tomorrow's Gorton & Denton by-election as a loss of one of Labour's safest seats will make the Prime Minister's position all the more precarious.

It's not that Starmer is a supportive element of pound sterling, rather it's the fear of a left-leaning alternative that keeps currency markets up at night.

"A heavy defeat for the ruling Labour Party could re-ignite speculation over the Labour leadership and again weigh on sterling," warns Chris Turner, head of analysis at ING Bank.

Although the bookies and betting markets have Labour losing - Polymarket currently assigns the Green Party a 70% probability of winning the seat - there are other signals that suggest the day might go a lot better than expected.

For the pound, that would be a supportive development as it keeps the status quo intact and could well reduce risk premium in the currency. The pound to euro exchange rate fell through the course of February, but should political uncertainty lift, it could retrace some of its earlier losses and retest the 1.15 marker.

A Gorton and Denton voting intention poll conducted by Opinium released on Tuesday had the Greens and Labouar neck-and-neck at 28%, with Reform third on 27%.

On Monday Keir Starmer actually visited Gorton and Denton, calling it a "straight fight between Labour and Reform."

"This is not something parties do unless they are confident of winning. So Labour either believe they have it in the bag, or someone has their sums wrong," says Jessica Elgot, deputy political editor at The Guardian.

Keiran Pedley, a pollster at IPSOS - the polling firm - says it's hard to interpret Starmer visiting Gorton as "anything other than Labour feeling confident they can hold it. Not clear why he’d got otherwise."

With a loss already factored into GBP value, a win by Labour could prove the market-moving event when the results are absorbed in Friday's trading session.

A constituency-specific poll released by Omnisis last Friday also confirmed the tightness of the race as it showed the Green Party leading with 33%, Reform on 29% and Labour on 26%, all are within the margin of error.

If Labour does better than expected, Starmer's position is emboldened and the political risks that caused the currency jitters in January and February would likely fade.

Luke Tryl, director of More in Common, another pollster, says Gorton and Denton is one of those rare by-elections where the word seismic might be useful, because it will have all sorts of narrative impacts.

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A Labour win, he says, would vindicate Starmer's decision to block his potential rival Andy Burnham from competing in the seat.

He says it could also suggest "things aren't as bad as they look in worst polls, greens aren't splitting the left vote as much."

Markets are also looking towards the May local, Welsh and Scottish elections as a bigger test for the Prime Minister, with analysts warning it's after a bad loss in these elections that someone would move against Stearmer.

But Tryl says if Labour holds Gorton and Denton, "maybe the worst end of May avoidable."