Picture by Simon Dawson / No 10 Downing Street.
The British pound is down, but not yet out. That could change.
Keir Starmer is effectively done; the herd is moving against him and it's now a question of how the transition unfolds.
Three Cabinet ministers, including the Home Secretary Shabana Mahmood, have called on the Prime Minister to consider his position after a speech aimed at resetting his agenda landed poorly with the Labour Party.
By the end of Monday, 79 Labour MPs publicly demanded his resignation, including six ministerial aides who quit the Government to back the mutiny.
Wes Streeting is tipped to make a go for it, but there's hope amongst many in the party that a contest is delayed long enough to allow Manchester mayor Andy Burnham to stand in a by-election, win, walk into Westminster and be coronated by his fellow leaders as next PM.
What Does This Mean for the Pound?
There's a heavy feel to GBP price action, but no panic. The currency market has been remarkably calm, with pound-euro dipping on Monday and holding steady at 1.1540 on Tuesday.
Pound-dollar eases back to 1.3570 on Tuesday, putting it just below recent highs.
Bond markets are where there's a definite sense of unease: UK bonds, known as gilts, fell sharply on Monday and their yield shot up.
Yields have risen in other countries too, owing to another rise in oil prices, but it's important to note that UK yields have easily outpaced their peers, suggesting a UK-specific premium is being demanded.
In short, politics does matter.
"The market’s main concern here, and the reason for this Gilt underperformance, is twofold – firstly, that a new PM would shift to the left, and loosen/scrap the UK’s current fiscal rules; and, secondly, that doing so would exacerbate the UK’s inflation problem. With political uncertainty likely to persist for a while, and the fiscal rhetoric only set to ramp up, those considering buying the dip in Gilts may be minded to wait a while," explains Michael Brown, Senior Research Strategist at Pepperstone.
Consensus projections for the next four quarters, compiled from leading investment banks.
Access the full forecast →
But Why is the Pound Relatively Sanguine?
It would be wrong to say the pound is completely ignoring the politics: the losses are almost certainly down to what's happening in Westminster, but it's important to stress this isn't a market in panic mode.
Panic would be a Liz Truss moment, which resulted in a severe GBP selloff.
We saw smaller panics in January and July of 2025 when the market worried about the fiscal setup under Rachel Reeves and whether she would be able to get a grip on spending.
Panic Can Still Ensue
Having covered pound sterling for many years it's important to stress the market can quickly shift and we would be very wary of a big drop in the pound in response to all this.
The sanguine FX market reaction can suddenly change its tune, and when it does, it can be ugly.
So for those with FX payments, be incredibly wary and plan accordingly.
Starmer's Replacement Will Matter
We suspect the market would be relatively welcoming of a Streeting premiership as he is more likely to stick to the fiscal rules.
However, things might change under either a Burnham or Rayner premiership. These two candidates are left-leaning and will change the UK's fiscal rules.
That means more spending financed by borrowing, which would pressure debt markets. The pound would likely fall in a notable fashion under such a shift.
Bond Yields are Providing a Currency Backstop
Bond yields have risen in response to a combination of elevated oil prices and building political concerns.
In normal times, a rise in yield would be supportive of sterling as international capital chases higher returns.
We suspect pound sterling's relative resilience could reflect some demand for UK bonds from international buyers who like the idea of superior returns.
Above: UK ten-year bond yields have jumped, largely thanks to rising oil prices (lower panel).
Of course, confidence matters: as long as these investors believe the ship will right itself after this period of political instability, they will be happy to buy.
If that confidence takes a knock, bonds and the pound will sell off in tandem and a real rout could ensue.
