The Pound Sterling currency plunged to a five-week low on Friday, hitting $1.3354 against the US Dollar. The fall was triggered by a deepening leadership crisis in the United Kingdom government after the surprise resignation of Health Secretary Wes Streeting, which increased speculation about the downfall of Prime Minister Keir Starmer.
Investors’ concerns have now shifted to Manchester Mayor Andy Burnham, who reportedly has a path to return to Westminster parliament via a by-election in the Makerfield seat. Burnham is seen as a “big risk” by financial markets due to his tendency to relax strict government spending rules if he takes over the leadership of the Labour Party.
The UK bond market also showed a negative reaction with the 10-year Gilt yield jumping to 5.11%. The surge in government borrowing costs reflects investors’ fears of potential fiscal instability under the country’s new leadership, which may be more inclined towards high public spending to win over party members.
In addition to political factors, the UK economy continues to be squeezed by rising global energy prices due to the ongoing conflict in Iran. With crude oil prices having surged by more than 50% since the war began, Britain, which is heavily reliant on energy imports, is now facing inflationary pressures that the Bank of England is finding increasingly difficult to control.
Analysts at Deutsche Bank and ING have warned that the Pound’s volatility will continue to rise ahead of the Makerfield by-election this summer. The combination of domestic political paralysis and a challenging global economic environment leaves UK assets highly vulnerable to further depreciation.
