File image of Keir Starmer. Picture by Simon Dawson / No 10 Downing Street

The pound faces a fourth weekly loss as Labour's by-election collapse stokes fears of political and fiscal upheaval.

The pound to euro exchange rate (GBP/EUR) is on course to register a fourth consecutive weekly loss as political uncertainty builds in the wake of the Labour Party's crushing defeat in the Gorton and Denton by-election.

To be sure, gilts and the pound showed no immediate panic following Labour's loss of a top-ten safe seat, but it is now even more difficult to identify near-term positives for either asset class as British politics veers leftwards.

GBP/EUR came under pressure on Thursday and extended losses to 1.1422, while the gilt market has so far avoided disorderly moves.

"This is only the morning after the night before. A lot depends on how Labour MPs move over the 24hrs. A concerted attempt to remove Starmer would be negative for sterling and gilts," says Neil Wilson, UK Investor Strategist at Saxo.

The political implications of the loss are significant. Andrew Neil, the veteran British journalist, argues the defeat exposes fault lines within the Labour Party.

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"There will be panic in Labour ranks now that its Left has been exposed, with two-thirds of Labour parliamentary Labour Party and most of the Cabinet now at risk," he says.

He adds that the result could pull the party further leftward, "or, more likely, result in his replacement by the Soft Left (now in the Labour driving seat) by someone who is proper Left. A new phase in British politics has begun."

For currency markets, the key question is fiscal direction.

A shift toward more expansive public spending or a leadership change that weakens perceived fiscal discipline would likely raise the risk premium embedded in sterling and UK government bonds.

ITV political editor Robert Peston frames the result as a turning point.

"So what follows from Labour's Gorton catastrophe?" he asks, arguing that the implications of "the trouncing of Labour in Gorton and Denton" are twofold.

"First, the pressure for a massive overhaul of Labour's political positioning and policies will become irresistible.

"Second, Starmer's own credibility is now so damaged that he will struggle to recover."

Markets are especially alert to the surge in support for the Green Party, whose platform includes significantly higher public spending.

Susannah Streeter, Chief Investment Strategist at Wealth Club, says the fiscal consequences could linger.

"Given the surge in support for the Green party, which promises a huge expansion of public spending, concerns will stick around future fiscal responsibility in the UK. While one by-election doesn't point to electoral success, the win is likely to increase pressure on Keir Starmer to step down and if this occurred his replacement in the Labour party is expected to be more left-leaning with a looser hand on the public purse."

For now, sterling and gilts are reflecting caution rather than capitulation.

But with political uncertainty rising and the perceived direction of travel for UK politics tilting leftward, the pound's recovery prospects appear constrained unless clarity emerges quickly from within Labour's ranks.