The Pound to Euro (GBP/EUR) exchange rate dipped to 3-week lows just below the 1.1500 level on Tuesday before a tentative recovery to around 1.1530 in very choppy trading as markets digested major political tensions and acute pressure on Prime Minister Starmer.
Nomura maintains a negative stance on the Pound and has raised its conviction that GBP/EUR will slide to 1.1170 by the end of June.
Political developments will dominate in the short term with fresh speculation that Prime Minister Starmer will face a leadership challenge following very poor local election and devolved parliamentary results last week.
Although there has been no move yet, there is strong speculation that Health Minister Streeting will launch a challenge.
Nomura expects uncertainty will hurt the Pound in the short term. The bank considers that political uncertainty will not necessarily trigger a shift in fiscal policy, but also notes underlying vulnerability for the bond market given that around 35% of gilts are held by overseas investors.
Assuming a contest, the bank considers that there could be some relief for bond markets and the Pound if Streeting wins. Any other outcome would pose potentially higher risks for the Pound.
