Pound Sterling and Starmer Under Pressure

🎯 GBP/EUR year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. 📩 Request your copy.

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

Political risk makes a comeback and the British pound declines against the euro.

The pound to euro exchange rate (GBP/EUR) reached a new four-month high at 1.16 Wednesday but then turned south and ended the day deep in the red at 1.1560 as pressures mounted on the UK Prime Minister.

An extraordinary session in the UK's parliament unfolded through the afternoon, where the Prime Minister admitted he knew damning details about Peter Mandelson before appointing him to be the ambassador to the United States.

Losses for the pound extend into the Thursday session, with GBP/EUR - the main barometer of UK-specific sentiment in FX markets - reaching 1.1543, amidst negative headlines about Starmer's grip on power.

"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, a strategist at Deutsche Bank.

The Times leads on Thursday with "Starmer fights for future after ‘shocking’ Mandelson admission" and the Telegraph says "Rayner leads Labour MPs in revolt against Starmer".

It is reported Starmer has outraged his own MPs after saying he had been warned about Peter Mandelson’s friendship with Jeffrey Epstein before appointing him as ambassador to the U.S.

For the market, the implications are clear: there's a rising risk he is replaced by a more radical leftist with a profligate approach to the UK's finances. The issue has cropped up on numerous occasions in the recent past, so it's something markets are wary about.

The Mandelson affair is the latet misstep by a Prime Minister that has come under considerable pressure in his short stint in the top job.

"Keir Starmer's position as Labour leader and Prime Minister is under rising pressure from Labour's poor poll ratings," says Michael Saunders, Senior Advisor to Oxford Economics.

"If Starmer is ousted, the main alternatives (Wes Streeting, Angela Raynor, Shabana Mahmood and, less likely this year, Andy Burnham) would all probably imply a shift in economic policy priorities," he adds.

🎯 GBP/EUR year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. 📩 Request your copy.

Starmer admitted to MPs in Prime Minister's Questions on Wednesday that he knew of allegations made against his pick for next U.S. ambassador, Peter Mandelson.

He was then forced by his party's MPs to perform a u-turn on a decision to not allow the release of documents relating to that appointment.

Polymarket has the odds of Starmer being ousted by December at 63%, with bookies showing odds showing Angela Rayner slightly ahead of Wes Streeting and Andy Burnham for favoured replacement.

The risk for the pound and UK fiscal assets is that a new leadership triggers a deterioration in the UK's finances by overseeing excess spending.

An under-pressure Starmer might also himself be inclined to avoid any tough decisions that would be necessary to ensure stability.

It's little wonder then that the pound is showing some nerves over recent developments.

"The near-term plans for public spending have been raised, matched by delayed tax hikes in the run-up to the next general election. Under any Labour leader, it's likely that the aim of lifting Labour's poll ratings will mean the planned fiscal tightening will not all occur," says Saunders.

The Bank of England decision is due later Thursday and could offer the pound a distraction. However, it's clear that UK politics could be an increasingly important driver of pound exchange rates in 2026 and we'll continue to monitor the headlines concerning the PM's future.