The British Pound (GBP) declined to around $1.32055, a 0.24% decrease, against the US Dollar (USD) on Monday, as political instability in the UK overshadowed market sentiment. Prime Minister Keir Starmer is reportedly considering his political future following rival Andy Burnham's decisive election victory, with some allies expecting him to announce a timetable for his departure. This potential leadership change is a significant factor weighing on Sterling, as Burnham's more left-leaning policy instincts raise concerns about fiscal discipline.
Adding to the market's unease, investors are awaiting Andy Burnham's views on fiscal policy, as any relaxation of current fiscal rules could negatively impact the UK bond market and further weaken the pound. UK government bond yields have already risen, increasing slightly more than those for German debt, following higher-than-expected borrowing figures and Burnham's election victory. The Bank of England's recent decision to hold rates at 3.75%, with a more hawkish vote split, has also contributed to gilt yields reaching a one-week high.
Globally, the US Dollar strengthened due to uncertainty surrounding a tentative US-Iran peace deal. President Donald Trump's threats to restart the Middle East war and Tehran's closure of the Strait of Hormuz led to a sharp fall in shipping traffic, pushing Brent crude futures up 1.30% to $81.62 a barrel. Concurrently, a hawkish shift by the Federal Reserve, with traders anticipating 43 basis points of rate hikes this year and a 25 basis point increase fully priced in by September, also bolstered the dollar. The Japanese yen, meanwhile, slipped to 161.53 per dollar, near a two-year low, erasing gains from previous interventions as the Fed's stance ramped up rate hike bets. Yields on 2-year US Treasury notes rose to their highest since early 2025 at 4.2276%.
The FTSE 100 closed down 0.4% at 10,363 points, marking a 1% weekly loss, the steepest since early May. The FTSE 250 midcap index also fell 0.6%, down 0.5% for the week. Energy stocks such as BP (up 2.8%) and Shell (up 1.1%) provided some support as crude prices increased. However, other companies like homebuilder Barratt Redrow saw shares drop 1%, and Ladbrokes-owner Entain's stock fell 1.2% amidst exploring options for its joint venture. This broad market decline reflects the pervasive impact of both UK political uncertainty and geopolitical tensions.
Allies of Keir Starmer reportedly expect him to set out a timetable for his departure in the coming days, potentially ushering in the UK's seventh premier in a decade. While some Labour Party members prefer a quick, uncontested handover to Burnham, others advocate for a proper leadership race. Key cabinet ministers, including Foreign Secretary Yvette Cooper and Home Secretary Shabana Mahmood, have reportedly urged Starmer to resign. This political maneuvering contributes to the significant risk premium currently affecting Sterling and implies that a drawn-out contest or disorderly transition could lead to further market instability.
