The Pound to Euro (GBP/EUR) exchange rate edged slightly higher on Wednesday, but analysts at Macquarie Group are warning traders against betting on further Sterling gains as political uncertainty surrounding Prime Minister Keir Starmer deepens.
The Pound-to-Euro rate traded at 1.1547, up 0.11% on the day, though the pair remains below April highs near 1.16 after a softer run for Sterling in recent sessions.
According to Macquarie strategists, growing speculation over Keir Starmer’s future as Labour leader is beginning to weigh more heavily on UK assets, particularly the gilt market and the Pound.
“Traders today may be getting increasingly dismayed by the prospect of a leadership change in the UK,” the bank said.
Macquarie noted that sterling investors would likely prefer Health Secretary Wes Streeting as any potential successor, given he is viewed as fiscally pragmatic and closer to Labour’s more market-friendly “Blairite” wing.
By contrast, Andy Burnham is perceived by markets as less constrained by fiscal rules and more willing to support higher public spending and investment.
“Andy Burnham… is seen as being less constrained by financial markets, and less willing to restrain public investment to reduce the deficit under the UK’s fiscal rules,” Macquarie said.
The bank added that uncertainty surrounding the leadership situation was helping drive volatility in UK government bonds.
“Gilt markets have been volatile in a bad way this morning, and the GBP has weakened vs. the USD and EUR on the prospect that uncertainty over the premiership will endure,” analysts said.
The move higher in UK bond yields has become a growing concern for currency traders.
UK borrowing costs have surged in recent weeks as investors reassess fiscal risks, sticky inflation pressures and the possibility of looser spending policies if Labour shifts further left politically.
Macquarie said the spillover from rising gilt yields was also feeding into global bond markets, with upward pressure extending into both US Treasury and German Bund yields.
Despite elevated UK interest rate expectations offering some support to Pound Sterling earlier this year, analysts increasingly believe the political backdrop may begin to dominate Pound trading.
“We wrote last week that we’d avoid being short EUR/GBP, as the overhang over Starmer’s survivability may endure for several weeks,” Macquarie said.
Prediction markets currently imply roughly an 80% probability that Starmer leaves office before year-end, although traders see a far lower chance of an immediate departure this month.
Recent GBP/EUR price action reflects the growing uncertainty. After rallying strongly through April, the pair has struggled to maintain momentum in May amid rising speculation over Labour leadership tensions and renewed gilt market volatility.
Rabobank this week similarly warned that EUR/GBP could trend higher over the medium term as investors begin pricing a larger UK political and fiscal risk premium into Sterling.
GBP/EUR Forecast: Political Uncertainty Could Cap Sterling Gains
While higher UK interest rate expectations have helped underpin the Pound against the Euro in recent months, analysts increasingly caution that political instability and concerns over fiscal credibility could begin to outweigh monetary support for the British Pound.
If markets continue reducing expectations for aggressive Bank of England tightening while UK political tensions intensify, the EUR to GBP exchange rate could push higher again over the coming quarters.
