Sterling Slides as Starmer Faces Calls to Resign, Adding Market Uncertainty
Market Reactions to UK Political Turmoil
By Lucy Raitano
Sterling Performance Amid Political Pressure
Reuters May 13 - Sterling fell on Wednesday and was on track for its first weekly decline in six weeks, with market participants assessing political developments in Britain as Prime Minister Keir Starmer resisted calls to resign.
The pound was last 0.2% lower against a broadly stronger dollar at $1.351.
Starmer's Response and Market Sentiment
Fighting for his political life after dozens of his lawmakers called for him to quit, Starmer promised on Wednesday to press ahead with plans to reform Britain and warned of chaos if he were to be ousted.
Analyst Insights on Political Uncertainty
"The UK now looks set for a summer of severe political uncertainty," said Kallum Pickering, chief economist at Peel Hunt, in a note. "Against the already inflationary backdrop of the Iran war, gilt markets will remain especially skittish and equity markets may struggle to make gains short of an (unlikely) quick resolution on the domestic political front."
Against the euro, sterling rose 0.1% to 86.59.
Moves are more muted than in the previous session, when the pound shed 0.5% against the dollar in its biggest daily drop in nearly six weeks.
"Maybe now that he's saying he's going to stay on, that is - in the short term - calming markets a little bit," said Tommy von Brömsen, FX strategist at Handelsbanken in Stockholm.
Gilt Market Volatility and Broader Implications
Moves have been more pronounced on the gilt market, but British government bonds clawed back some ground on Wednesday after being roiled in recent weeks by investor jitters around the potential for more spending if Labour gets a new leader.
"But I think the bigger worry is that, not only are we seeing near-term volatility in gilt markets and in sterling, but also that this episode is another nail in the coffin for deep structural concerns about the UK's ability to find leaders who can come up with a credible plan to fix the country's finances and deliver growth," wrote Neil Wilson, Saxo's UK investor strategist.
Bank of England Outlook
Traders are betting on a 50% chance of no change at the Bank of England's (BoE) next meeting on June 18.
Last month, the BoE kept interest rates on hold and set out scenarios for the economic impact of the U.S.-Israeli war on Iran, one of which could require a "forceful" increase in borrowing costs.
(Reporting by Lucy Raitano; Editing by Thomas Derpinghaus)
