According to ING’s Francesco Pesole, the British pound has begun to experience pressure due to rising political uncertainty in the UK, as calls for Prime Minister Keir Starmer’s resignation have intensified. Betting markets are now indicating a high probability that Starmer will leave office within the year, contributing to the emergence of a political risk premium in EUR/GBP for the first time in a long period [1].
Pesole notes that the current risk premium is still relatively small, with ING’s model showing around a 0.3% short-term overvaluation in EUR/GBP. However, he warns that sterling has significant room to build a further negative premium, especially as markets shift their attention to potential leadership contenders and the credibility of fiscal rules [1].
Recent reports suggesting that Burnham could seek a parliamentary seat to advance a leadership bid have added to market concerns. Specifically, Burnham’s views on abandoning the fiscal rule are seen as potentially undermining a key anchor of market confidence in UK public finances, which could exert additional downward pressure on sterling [1].
Overall, the market reaction has been cautious, with sterling coming under pressure following these political developments. The focus is expected to remain on leadership prospects and fiscal policy credibility as the situation evolves [1].
CONCLUSION
Political uncertainty in the UK is beginning to weigh on the British pound, with a modest risk premium emerging in EUR/GBP. Market participants are closely watching leadership developments and fiscal policy signals, which could further impact sterling’s performance in the near term.