Pound Sterling Slips Despite Strong UK Growth

The British Pound softened against the Euro and US Dollar despite stronger-than-expected UK growth data, with investors increasingly focused on rising political uncertainty surrounding Prime Minister Keir Starmer.

Analysts at MUFG said the Pound Sterling had continued trading on a “softer footing” even after UK GDP figures showed the economy expanded by a stronger-than-expected 0.6% in the first quarter, the fastest pace of growth since early last year.

MUFG noted that both consumer spending and business investment contributed to the stronger performance, with private consumption rising 0.6% and business investment up 0.7%.

“Stronger UK cyclical momentum alongside higher UK yields and favourable conditions for carry trades have helped the pound to surprisingly outperform so far during the Middle East conflict,” MUFG said.

However, the bank warned that near-term downside risks for Sterling are increasing as speculation surrounding Starmer’s future intensifies.

“It has been reported that Prime Minister Keir Starmer could face a leadership challenge as soon as today,” MUFG said.

According to the bank, growing political tensions inside Labour are beginning to unsettle financial markets, particularly after reports that Health Secretary Wes Streeting could launch a leadership bid.

MUFG also highlighted speculation surrounding Angela Rayner and Manchester mayor Andy Burnham, noting that Labour members appear increasingly supportive of candidates from the party’s “soft left”.

“The survey indicates that a soft left Labour candidate is mostly likely to replace Keir Starmer if a leadership contest takes place,” MUFG said.

The bank warned such an outcome could increase market concerns over UK fiscal risks and place further pressure on both gilts and Sterling.

UK government borrowing costs have already risen sharply in recent weeks as investors reassess inflation risks, higher energy costs and the prospect of looser fiscal policy.

While expectations for higher Bank of England interest rates have supported the Pound in recent months, analysts increasingly question whether political uncertainty could begin outweighing that monetary support.

MUFG said slower growth later this year still appears likely as higher energy costs from the Iran conflict feed through into the broader economy.

The bank added that the UK’s stronger starting point heading into the energy shock may help cushion the slowdown, but markets are now becoming increasingly sensitive to political developments in Westminster.