Pound Sterling Passes Peak Danger, But to Remain Vulnerable

Angela Rayner, right, declared her support for Keir Starmer on Monday. Picture by Lauren Hurley / No 10 Downing Street. 12/01/2026.

A concerted campaign by the Prime Minister buys him time.

The British pound recovered from daily lows against the euro, dollar and other currencies as it became clear there was not yet enough momentum to unseat Starmer.

Market concerns eased after 10 Downing Street coordinated a show of public support by the Cabinet, with all members of the top leadership team publicly stating they back the Prime Minister.

Potential leadership rivals, including Wes Streeting and Angela Rayner, gave their support.

The pound to euro exchange rate (GBP/EUR) recovered to 1.1494 following the developments.

Earlier, it had reached a low at 1.1439 when Scotland's Labour leader Anas Sanwar called for Starmer's resignation, raising fears it would open the floodgates to further calls.

GBP/EUR is considered the key indicator of UK-specific concerns, as the pound to dollar exchange rate (GBP/USD) is overwhelmingly being driven by USD movements.

Here, a major USD selloff helped the currency pair record a comfortable gain on the day, regardless of domestic shenanigans.

Above: GBP/EUR is the benchmark for UK-specific risk. It recovered as Downing Street prompted the Cabinet to get behind the Prime Minister.

Political commentators say it was too early to launch a coup against Starmer as a major by-election and the May local elections loom; no new party leader will want to preside over the inevitable drubbing Labour will receive.

The time to unseat Starmer is coming, and this means the pound will remain nervous and reflect a political risk premium.

● Why Starmer Matters for the Pound

It's been a shaky relationship between Starmer's administration and financial markets, but what is abundantly clear is that whoever replaces him will likely be far worse for financial stability.

James Kirkup, Director of the Social Market Foundation, warns that a shift leftwards in economic policy is highly likely: "Most Labour MPs and members were uncomfortable with both McSweeney’s mild social conservatism and Rachel Reeves’ fiscal realism. They worry more about losing what they see as their natural supporters to the Greens than they do about bleeding votes to Reform."

"MPs and members are often frustrated by what they see as Starmer and Reeves’ capitulation to markets... A spendthrift reputation has historically been the party’s downfall, and spooking the bond markets would likely mean a Truss-level disaster," he adds.

According to a recent Survation poll, assuming Starmer ran again, he would likely lose in a head-to-head vote of party members against Angela Rayner, but could win against most other candidates.

"The GBP would be vulnerable to a shift in Labour leadership and a shift to the left. Starmer is at the right of the Labour party and towards the centre of UK politics," says Steve Englander, FX strategist at Standard Chartered.

The pound and gilts have fallen in tandem at various points during the current Labour government, a signal of fears that UK debt dynamics are becoming unsustainable.

Business and consumer confidence has meanwhile struggled as the government's two budgets have introduced swingeing tax rises.

"The GBP would likely be sensitive to a replacement from the left wing of the party, who would probably face pressures to differentiate their economic and geopolitical policies from Starmer’s. In the approach to the November budget statement, we saw GBP slipping on market concerns that spending plans would badly exceed revenues," says Englander.

The Standard Chartered analysts says a best-case scenario for the GBP would be if an economic bounce gave Starmer a boost that outweighed the political risk he is currently facing.

"However, if it becomes likely that he will be replaced, we could see EURGBP threatening November 2025 highs again," he warns.