The British pound slipped for a second consecutive day on Wednesday, fueled by a combination of soft labour market data and growing political uncertainty surrounding Prime Minister Keir Starmer. Reports in UK media indicated that Starmer may be facing potential leadership challenges, adding to market volatility and weighing on sterling.

Political Concerns Weigh on Sterling

Several British media outlets reported on Wednesday that allies of Prime Minister Starmer warned he would resist any attempts to unseat him. Health Secretary Wes Streeting also publicly denied claims that he was plotting to overthrow the Prime Minister.

“The pound is staying weak and you’d think it probably does relate to this Starmer story,” said Chris Turner, head of research at ING.
“The uncertainty around the post-budget environment demands extra risk premium for sterling.”

Investors are increasingly cautious as political tensions add uncertainty to the UK’s post-budget environment, raising concerns over the pound’s near-term performance.

Sterling Performance Against Major Currencies

The pound was last down 0.2% against the US dollar, trading at $1.3125. Against the euro, sterling slipped 0.1% to 88.26 pence, approaching its lowest level in over two and a half years.

Despite this recent weakness, sterling has gained roughly 5% against the dollar so far this year. However, market nerves are rising ahead of the UK government’s November 26 budget, with expectations of tax increases to balance public finances.

Economic and Budgetary Pressures

The outlook for public finances has worsened due to previous plans to scale back welfare spending cuts and a projected downgrade in productivity forecasts by the UK’s budget watchdog. These developments, combined with political uncertainty, have added pressure on the pound.

Meanwhile, British government bonds underperformed compared to their European and US peers. The 10-year gilt yield rose by three basis points, reflecting investor caution.

Bank of England Rate Cuts on the Horizon

Market participants are pricing in a roughly 75% probability of a quarter-point interest rate cut from the Bank of England in December. This expectation follows Tuesday’s labour market data showing the unemployment rate ticked up to 5%, while pay growth excluding bonuses slowed to 4.6% over the three months to September.

“We think the UK economy is weaker relative to the euro area, which should pave the way for a weaker pound here,” said Mohamad Al-Saraf, FX strategist at Danske Bank.

Recent statements from Bank of England rate-setter Megan Greene acknowledged the slowdown in wage growth but highlighted concerns about potential high pay settlements next year. Greene voted with the majority to maintain the Bank Rate at last week’s policy meeting.

Outlook for Sterling

The combination of political uncertainty, muted economic growth, and looming fiscal pressures suggests that sterling may face continued volatility in the coming weeks. Investors are closely monitoring both UK domestic politics and economic indicators to gauge the pound’s trajectory ahead of the budget announcement and potential monetary policy changes.