Sterling weakened against both the dollar and the euro on Tuesday as investors closely monitored political developments in the UK, with mounting concerns over Prime Minister Keir Starmer's future in office. The pound dropped 0.45% against the US dollar to trade at $1.3550, erasing gains made after Starmer vowed to stay on last Friday. Against the euro, sterling fell 0.17% to 86.72 pence per euro, its lowest since April 28.
The political uncertainty intensified after nearly 80 Labour lawmakers publicly called for Starmer to step down following heavy local election losses. Despite an emotional appeal on Monday, more than 80 MPs have now urged him to set a resignation timeline. Investors fear that a leadership change could usher in a more left-leaning government, leading to looser fiscal policies and increased public borrowing.
UK government bond yields surged in response, with the 10-year gilt yield up 11 basis points to 5.11%, approaching levels not seen since 2008. The 30-year gilt yield climbed 10 basis points to 5.78%, near its highest since 1998. These moves reflect mounting nervousness about Britain’s fiscal trajectory.
UK equities also came under pressure. The FTSE 100 fell 0.4% and the FTSE 250 dropped 1.2% by mid-session. Banking stocks led declines, with the banking index down 2.3% and Metro Bank falling 5.2%. Barclays shed 3.6%. Aerospace, defence, and real estate sectors also retreated, highlighting broad risk-off sentiment.
Adding to the cautious mood, US President Donald Trump said the ceasefire with Iran was “on life support,” and Tehran rejected a US proposal, keeping Middle East tensions elevated. The combination of domestic political instability and geopolitical risks created a challenging backdrop for UK financial markets.
