Pound Sterling Faces Massive Blow on Rayner Leadership Bid
- Written by: Gary Howes
File image of Angela Rayner. Source and license: Ministry of Housing, Communities & Local Government.
Pound sterling would come under notable pressure if Prime Minister Keir Starmer were to be replaced.
This is according to analysts we follow who cite growing evidence that former Starmer ally Angela Rayner is being lined up to replace Starmer in the coming year, marking a leftward slide in government as a key risk for the currency in 2026.
"There will be plenty of room to chase GBP lower if this materialises!" says a trader at JP Morgan.
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Sterling has broadly stabilised since Rachel Reeves delivered her Autumn Budget on 26 November, with investors welcoming the impression of fiscal discipline and continuity at the top of government.
UK assets saw a firmer tone around the event, with reports of both the pound and gilts finding support as the Budget delivered the expected tightening while signalling stability in the public finances.
For FX traders, a key downside risk for 2026 is that this stability is disrupted by a Labour leadership upheaval that removes Starmer and his Chancellor and replaces them with a figure perceived as further to the left.
On JP Morgan’s trading desk, the emerging name around that risk is Angela Rayner, whom they see as a substantial potential negative for the pound
"The other thing to note is the velocity of Rayner’s media coverage has taken a step up this week after the Labour Together leadership survey has forced the spotlight on potential suitors," says the trader.
"I still think it is way too early and any suitor worth half their salt would know that taking the reins ahead of May would have a pretty short stint themselves, the risk is that it happens quickly in an attempt to give themselves time to turn things around ahead of the local elections," he adds.
Image courtesy of Labour List.
The warning sits squarely within a pattern that has already been visible in sterling in recent months.
In July, Pound Sterling Live reported how the pound and UK bonds sold off sharply when markets began to question whether Reeves would remain in post, a move linked to concerns that fiscal discipline could give way if a more left-wing replacement took over at the Treasury.
A subsequent episode of weakness came when speculation centred on Manchester mayor Andy Burnham’s leadership ambitions, with investors again seen marking down sterling on fears of a looser fiscal and regulatory stance under an alternative Labour figurehead.
Those episodes are now the template for how markets might react if Rayner were to mount a serious bid.
"This is not something I would position for there will be plenty of room to chase GBP lower if this materialises!" says the JP Morgan trader.
Above: File image of Andy Burnham. Copyright by World Economic Forum / Faruk Pinjo. Licensing and source.
Rayner has long been seen as a potential future leader of the Labour Party. Coverage during Labour’s first year in power noted that she was increasingly touted as a replacement for a struggling Starmer, even before her resignation as deputy prime minister over her tax affairs.
That background is now being refreshed by a new wave of reporting.
Recent analysis has cast Rayner as the second favourite to succeed Starmer and explored what a 'Rayner government' might look like, highlighting business and market concerns about a perceived tilt to the left and the implications for growth, regulation and investor confidence.
Above: Labour under pressure in the polls under Starmer.
At the same time, the Labour Together organisation - which helped run Starmer’s leadership campaign - has begun canvassing members on potential leadership candidates, a move widely interpreted as preparation for a possible change at the top.
Polling of Labour members suggests that Rayner would be a strong contender in any contest, with one recent survey showing Starmer would lose head-to-head races against several high-profile figures, including Rayner and Burnham.
For currency markets, that mix of internal polling, think-tank surveys and media focus amounts to a clear rise in "velocity of coverage" around Rayner as a successor, exactly the dynamic flagged by JP Morgan's trader.
From an FX perspective, the concern is straightforward.
Investors have tentatively rewarded what looks like an orthodox, rules-based fiscal framework under Starmer and Reeves, helping GBP/EUR and GBP/USD recover from early-November lows as budget uncertainty faded.
A rapid pivot to a leader associated with the party’s left, at a time of high debt and weak growth, risks reviving fears of higher borrowing, heavier taxation on business, and a softer line on spending control.
In that scenario, the pound would likely face a dual hit from higher risk premia in UK gilts and renewed question marks over the UK’s policy credibility.
The message from JP Morgan’s trading desk is that such a scenario is not yet their base case, and they are not positioning aggressively ahead of May.
But the combination of rising leadership chatter, formal canvassing by Labour Together and Rayner’s renewed prominence means that if a challenge does break into the open, FX markets are poised to respond quickly.
