Pound Rises as UK Faces Political Uncertainty and Inflation Pressure
Market Reactions Amid Political and Economic Challenges
Recent Performance of the Pound
LONDON, May 18 (Reuters) - The pound rose on Monday, but remained just above its lowest since early April, which it hit earlier, as concern over a spike in inflation from rising energy prices collided with a political crisis in Britain.
Political Crisis and Its Impact
Pressure on Prime Minister Keir Starmer
Prime Minister Keir Starmer is under intense pressure to quit after dismal local election results earlier in May, which has pushed up gilt yields sharply and weighed on the pound.
Labour Party Turmoil
The heavy losses for Labour in the May 7 elections triggered almost a quarter of his lawmakers to call for him to go, and two rivals are openly vying to replace him, unsettling investors who have pushed up the government's borrowing costs.
Prime Minister's Response
"I am focused on the job that I was asked to do, which is to serve my country and to carry out my duties as prime minister of this country," he told staff during a visit to the Labour Party's headquarters.
Financial Market Movements
Sterling and Gilt Yields
Sterling was last up 0.4% on the day at $1.337, having fallen earlier by as much as 0.15% to $1.3304, its lowest since April 8.
UK gilt yields surged to multi-year highs last week, as investors fret that a potential left-leaning successor to Starmer might be inclined to expand government borrowing to boost growth, which would hurt Britain's already fragile finances.
Investor Sentiment and Inflation Concerns
Higher yields usually act as a draw to foreign investors who are seeking better returns. But in this case, stagnant growth and the risk of a bigger inflation shock in the UK, given the country's reliance on energy imports, have acted as a deterrent to holding the pound as well.
"The unfavourable domestic political developments come at a challenging time for the gilt market which is also facing the risk of much higher inflation from the energy price shock," MUFG currency strategists said.
Currency Strategy Outlook
They said they currently favoured selling the pound to buy the lower-yielding Swiss franc in the near term.
Bank of England and Future Expectations
Money markets show traders expect the Bank of England will need to raise interest rates at least twice this year, having priced in the prospect of around two cuts before the Iran war broke out in late February.
(Reporting by Amanda CooperEditing by Tomasz Janowski)
