ING’s Francesco Pesole highlights rising political uncertainty in the United Kingdom (UK) as calls grow for Prime Minister Keir Starmer’s resignation, with betting markets seeing a high chance he leaves office this year. He notes emerging political risk premium in EUR/GBP and warns sterling could face further pressure as markets assess leadership contenders and fiscal-rule credibility.

Sterling pressured by UK political turmoil

"The pound started coming under pressure yesterday afternoon (after a strong session) as calls for Starmer’s resignation intensified. For the first time in a long time, some political risk premium seems to be emerging in EUR/GBP."

"That is, however, still small according to our model, around 0.3% short-term overvaluation."

"The pound has plenty of additional room to build a negative premium, with markets likely to shift their focus to which candidate holds the best chance of replacing Starmer."

"Notably, sterling came under pressure recently following reports that Burnham could seek a parliamentary seat to advance a leadership bid, reflecting concerns that his views on abandoning the fiscal rule could undermine a key anchor of market confidence in UK public finances."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)