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[MARKET ANALYSIS] GBP softens modestly UK politics, EUR/GBP fails to catapult 0.8720

The political turmoil surrounding UK Prime Minister Starmer has had limited immediate impact on GBP and Gilts, indicating market resilience despite calls for his resignation.

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[MARKET ANALYSIS] GBP softens modestly UK politics, EUR/GBP fails to catapult 0.8720

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  • Sterling resilient to the political risks that emerged on Thursday afternoon. The UK PM is now facing calls to resign after news that Mandelson failed his vetting process for the Foreign Office. Some MPs have been calling for Starmer to resign: “I fail to see how Starmer survives this.”, one told the iPaper. Though close aides, like Chief Secretary Darren Jones, said the PM won't resign and didn't mislead Parliament. Starmer himself has denied any knowledge of the failed vetting. Given these reasons and the fact that PM has repeatedly said he wishes to see out his term with cabinet ministers recently voicing support for him, Gilts and Sterling, which initially weakened on the news, pared their respective losses. 
  • EURGBP grinded higher throughout Thursday afternoon and overnight from a 0.8693 base, though the move stalled at the day's session high of 0.8719. The cross in recent days has been sold on rallies with the latest political developments unable to catapult the it above the 0.8720 mark.
  • On a slightly longer horizon, MUFG writes this morning " The divisions within the Labour party look set to worsen after the local elections take place on 7 th May when the government are expected to perform poorly. Starmer will come under further inevitable pressure to resign."
  • Several trading desks in recent days have been recommending EUR/GBP, with Rabo on Wednesday writing: "Heading further into the spring, we see the downside bias as running out of steam and expect the currency cross to turn modestly higher." ING noted: "the latest developments keep us confident with our call that front-end rates have further to fall in the UK than the eurozone and that should offer lasting support to EUR/GBP beyond the near-term". Then, finally, a JPM trader suggested positioning for weakening fundamentals and more reactive FX hedging from European RM should help EUR. These recommendations are likely to be supported into May elections with Starmer on a somewhat weaker footing.
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However, the failure of EUR/GBP to breach the 0.8720 threshold reflects ongoing skepticism about the stability of the currency amid these developments and suggests that upcoming local elections may further exacerbate political divisions, potentially pressuring the GBP longer-term.

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