The British pound experienced sharp swings this week as UK politics took center stage. Prime Minister Keir Starmer's unexpected resignation late Sunday sent shockwaves through currency markets. Sterling fell as much as 1.2% against the US dollar at the start of the week, dropping below the psychologically important 1.25 level and touching a three-week low. The move reflected a sudden spike in political uncertainty, with investors flocking to safe-haven assets like the dollar and Swiss franc.
However, by Wednesday the pound staged a notable recovery against the euro, climbing to a 10-month high at 86.03 pence per euro, its strongest since August 2025. This reversal came as the political picture cleared. Andy Burnham, the former Manchester mayor, emerged as the likely successor without a major challenge after minister Darren Jones declined to run and endorsed him. Markets began pricing in a smoother leadership transition, with JPMorgan strategists noting that reduced political uncertainty could allow investors to refocus on the UK's resilient growth fundamentals.
Despite the euro gains, sterling remained under pressure against the dollar, last trading 0.1% lower at $1.319. The divergence was driven by expectations of further Federal Reserve rate hikes—traders priced in around 38 basis points of tightening this year versus 24 for the Bank of England—boosting the greenback. Reports also suggested current Finance Minister Rachel Reeves would likely leave her post under a Burnham government, adding another layer of fiscal policy uncertainty.
Analysts caution that while political clarity is supportive, the pound's trajectory will depend on whether the Bank of England can match the Fed's pace and on the policy direction of the new leadership. For consumers, a weaker pound could stoke inflation by making imports more expensive, while exporters might benefit.
