• EUR/GBP climbs toward one-month highs as UK political turmoil weighs on the Pound.
• UK gilt yields surge to multi-year highs as investors react to mounting political uncertainty.
• Traders price in at least two BoE and ECB rate hikes as rising Oil prices fuel inflation concerns.

EUR/GBP climbs to near one-month highs on Friday as rising political uncertainty in the United Kingdom pressures the British Pound (GBP). At the time of writing, the cross is trading around 0.8726, on track for weekly gains.

Sterling came under renewed pressure as speculation surrounding a possible leadership challenge to UK Prime Minister Keir Starmer intensified following Labour’s heavy local election losses. According to The Times, the Labour Party panel approved Greater Manchester Mayor Andy Burnham’s bid to return to Parliament, putting another key contender alongside Wes Streeting in the spotlight as pressure mounts on Starmer.

Burnham is seen as less market-friendly, with investors worried his leadership could lead to higher government spending and borrowing. Streeting, meanwhile, is viewed as a safer option for markets.

The political uncertainty also triggered sharp moves in the UK bond market, with UK 10-year gilt yields climbing toward 5.2% on Friday, their highest level since July 2008, as investors grew increasingly concerned about the UK’s fiscal credibility.

Alongside political developments, investors are also closely watching the monetary policy outlook as rising Oil-driven inflation linked to tensions in the Middle East raises the risk that major central banks may need to increase interest rates. Traders are currently pricing in at least two rate hikes from both the Bank of England (BoE) and the European Central Bank (ECB) by year-end.

However, the Euro (EUR) could face headwinds as higher energy prices and the Eurozone’s dependence on imported energy increase the risk of slower economic growth, potentially limiting how aggressively the ECB can raise interest rates even if inflation pressures continue to rise.

Looking ahead, investors will closely monitor next week’s key economic data releases, including inflation figures from both the United Kingdom and the Eurozone, along with UK employment data for the three months ending in March.