Pound Sterling Today: Vulnerable As UK Political Crisis Deepens, Say Rabobank

The Euro (EUR) strengthened against Pound Sterling (GBP) after renewed speculation surrounding Prime Minister Keir Starmer’s future added to concerns over UK political stability and the outlook for the British currency.

Currency analysts at Rabobank said Pound Sterling remains heavily driven by headlines surrounding Starmer’s leadership battle, warning that prolonged political uncertainty could push EUR/GBP higher over the coming year.

GBP initially recovered some ground during early European trade, but Rabobank said the rebound quickly faded as investors reassessed mounting tensions inside the Labour Party.

“The currency clearly remains beholden to news regarding the future of PM Starmer’s leadership,” Rabobank said.

Markets briefly stabilised after Starmer survived another night without a formal leadership challenge, although pressure on the Prime Minister intensified sharply earlier this week.

Rabobank noted that more than 80 Labour MPs have reportedly called on Starmer to resign, while four ministers quit the government yesterday.

The bank said reports suggesting Health Secretary Wes Streeting could resign and launch a leadership challenge “as soon as tomorrow” were adding further uncertainty for investors.

While Labour Party rules make removing an incumbent leader difficult, Rabobank warned the scale of internal divisions points to the risk of “a prolonged period of messy UK politics”.

“This hints at the possibility of a prolonged period of messy UK politics – something that the Labour party had promised to put a stop to,” the bank said.

UK Gilt Market Concerns Returning

Rabobank said political instability is increasingly spilling into UK financial markets, particularly the gilt market.

Although long-dated UK bond yields briefly steadied this morning, the bank warned further volatility remains likely if uncertainty drags on.

“Any wobble in the long end would also leave the currency vulnerable,” Rabobank said.

Investors are also reassessing Bank of England rate expectations.

Through March and April, Sterling was supported by a sharp repricing in UK interest rates as markets swung from expecting cuts to pricing multiple hikes following the Iran-driven energy shock.

However, Rabobank believes current pricing has become too aggressive.

“Currently the market is priced for three 25bp rate hikes on a one-year view. That said, in Rabo’s view this is too aggressive,” the bank said.

Rabobank argued that softer labour market conditions and growing spare capacity in the UK economy should ultimately limit the need for aggressive Bank of England tightening.

“A re-pricing in favour of one rate hike could weigh on the pound,” analysts added.

EUR/GBP Forecast: Rabobank Targets 0.89 as Pound Sterling Risks Grow

Rabobank continues to forecast the Euro to Pound exchange rate moving towards 0.89 over a 12-month horizon, implying broader Sterling weakness ahead.

The bank warned the UK’s large current account deficit leaves the Pound particularly exposed if political uncertainty combines with renewed gilt market stress or weaker growth expectations later this year.