Shabana Mahmood, Home Secretary, is said to have turned against the PM. Picture by Lauren Hurley / No 10 Downing Street.
Domestic politics is taking on more prominence for the pound.
Pound sterling is down across the board as traders decide they've had enough of Britain's latest political saga.
Having been relatively resilient to speculation over Prime Minister Keir Starmer's future, the pound-to-euro exchange rate had slumped to 1.15 by early Tuesday morning.
It has since recovered some ground on reports that Starmer successfully prevented Cabinet ministers from staging a meeting at this morning's Cabinet meeting at 10 Downing Street.
The Prime Minister told Cabinet that, "the Labour Party has a process for challenging a leader and that has not been triggered."
The Telegraph reports that six ministers - Shabana Mahmood, John Healey, Ed Miliband, Lisa Nandy, Yvette Cooper and Wes Streeting - had been expected to demand Sir Keir’s resignation.
However, the report goes on to say the Prime Minister did not give anyone a chance to speak out against him and instead set out his case on why he should remain in office.
Four Cabinet allies took the rare step of briefing journalists on camera after the meeting and insisted Sir Keir would stay on.
For markets, the prospect of Starmer surviving this period and staying on is a 'least-bad' outcome that would encourage the pound to recover.
We walked into the week thinking that Starmer was safe because there was no unified candidate or grouping driving a rebellion, but by Monday evening, a move against Starmer emerged and gained momentum. Prediction markets accordingly now assign an 87% probability to Starmer being out of office by the end of the year.
That changes the calculus for foreign exchange markets, and that's being reflected in the pound, and we would strongly encourage those with looming FX exposure to consider engaging a specialist FX provider to take advantage of the tools and guidance available to protect outgoing payment budgets.
Having witnessed the fall of Boris Johnson, we know that the movement of Cabinet ministers is critical when a PM resigns, and with six Cabinet ministers already having called for Starmer to move aside, we can confidently say his time is drawing to a close.
Consensus projections for the next four quarters, compiled from leading investment banks.
Access the full forecast →
A political risk premium is now clearly evident in GBP as traders fret that months of political instability and populist left-wing policy shifts await.
"The combination of the associated uncertainty, likely to drag on for weeks/months in the event of a leadership contest, alongside the already elevated level of gilt yields is a risk to the outlook," says Sam Hill, Head of Market Insights at Lloyds Bank.
For the pound, it could all rest with what the Cabinet does in the coming hours and days.
If the rebellion fails and the Cabinet sticks with Starmer, calm can quickly return.
Under such a scenario, we would imagine GBP/EUR snaps back to 1.1570 in relatively short order. "Whilst there are some obvious high-profile names likely to want to be in the running for PM, arguably there are significant practical hurdles to overcome first in many cases," says Hill.
Anything less than a unified backing of Starmer (and that means capitulation from the three rebels) and we will assume that there is an appetite to replace their leader.
Under this scenario, we would expect further meaningful losses for the pound.
Concierge Money Transfers
For high-value transfers, you need high-value service: dedicated account management, on-point pricing, insight into market conditions and trends, help with structuring your payment, and execution support at key moments.
Learn More →
