"Starmer in crisis as Labour falls to third in by-election" is the headline in the Telegraph.

It perfectly encapsulates why the Gorton and Denton by-election was such an important event for the country's politics and economics: there's a real prospect of a shift leftwards, which the pound does not like.

The pound to euro exchange rate dropped 0.45% on Thursday and is a further 0.15% lower today at 1.1408 after Labour came third to the Greens and Reform in the vote.

As Pound Sterling Live reported in one preview piece, it's not so much the loss that matters, rather the scale of the loss: the Greens secured a massive 40% of the vote, ahead of Reform's 28.7% and Labour's 25.4%.

Labour went into the contest holding a 13,413 majority, considering this one of their top-ten safest seats.

The swing against them is staggering, and it's hard to see the parliamentary Labour Party not acting by replacing their leader.

"The PM's position remain precarious," says a FX note from Barclays. "Whether the PM can survive a heavy loss remains to be seen, but equally, the loss in the by-election should not be taken for granted. The more fundamental issue is that the so-called soft left wing of the Labour party has increased its influence, which we think all else equal justifies a higher fiscal premium in the pound."

That risk premium is being absorbed across the pound sterling strip: it is lower against all G10 peers on Friday, confirming a negative idiosyncratic driver at play.

The scale of the defeat for Labour is made all the more significant because there was a glimmer of hope ahead in the days before the vote that the race was far closer than the bookmakers were predicting.

Indeed, the visit of Prime Minister Starmer on Monday to the area was taken as a sign of growing confidence that they would hold it.

But the bookmakers were, as is often the case, right, and Labour didn't stand a chance.

“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,” says Andrew Neil, the political broadcasting veteran.

Labour will pivot leftwards both under Starmer and his eventual replacement to meet the challenge of the Greens. For investors, that's a concern given this country's already precarious debt dynamics.

"A loss for the incumbent Labour Party in this traditional stronghold would ramp up pressure even more on PM Starmer and increase the likelihood of a change in leadership to a potentially less market-friendly combination in the months ahead, which remains an under-priced risk for GBP, in our view," says Dominic Bunning, FX Strategist at Nomura.