It’s currently a fast-moving situation in British politics and if you trade GBP, then gilts are currently the key to price action at present. Those UK government bonds underperformed sharply yesterday as yields hit fresh long-term highs, with the 10-year above 5.12%. Sterling similarly underperformed, which comes after last week’s disastrous UK local elections for the Labour government that saw them lose over 1,000 seats. That was really the ballpark figure between a bad day and a humiliating one where questions would be asked.
It seems we are now at that time. PM Starmer’s position looked untenable at the start of Tuesday, but he swiftly announced he would not be setting out a timetable for his departure, which was a ‘challenge me if you dare’ kind of cry. Nearly 100 Labour MPs have called for him to resign but more MPs backed him, and that meant a senior figure needed to put themselves forward to launch a leadership challenge. That may now be happening tomorrow after today’s King’s speech, if media reports are to be believed, as Health Secretary Wes Streeting is poised to challenge the leadership. Angela Rayner has also been touted as an outside possibility, but this could bring further division into the Labour party, as an early challenge might split the party between Starmer, Streeting and also Burnham supporters. Added to this is more ministerial-level resignations which put more pressure on Starmer to step down.
Market Impact
Britain suffers from the same malaise of high debt and low growth that infects the rest of Europe. Now its governing party is embroiled in a potentially messy civil war which adds much uncertainty to the country’s fickle finances. Betting markets currently have the odds of a Starmer departure at roughly 49% by June 30 and around 80% by the end of the year. The major risk for the UK remains centred on the fiscal outlook and the loss of confidence associated with a change in Chancellor, given the reassurance provided by Reeves and her adherence to self-imposed rules.
Of course, amid the rapidly changing events, Starmer’s initial comments yesterday were significant as it potentially signalled that Chancellor Reeves might remain in her post in the near-term. Going forward, the big concern is that Starmer’s successor will borrow more with Streeting seen as the most market friendly, and Burnham at the other end of the fiscal scale. The latter would potentially push gilt yields higher which means borrowing costs more and ultimately sees GBP selling.
GBP/JPY just below long-term resistance
Since the Liberation Day lows last April, this popular pair has been rising in a fairly neat bull channel, with a series of higher highs and higher lows. Prices more or less tracked the 100-day SMA with a sharp 2-day sell-off in mid-February pausing the upward rally. But bulls got their way again as the move made fresh highs at 216.59, just above the long-term top from 2008 at 215.89. This is strong long-term resistnace and the cross has fallen back to the 50-day and 100-day SMA around 213 and 212.08. This looks like bullish consolidation before another push higher into those peaks. A break higher could be tough if PM Starmer and the political situation in the UK gets chaotic. The fear of a more left wing leader and looser fiscal policy is real and would likely put pressure on sterling. A support zone sits around 208.11 and 208.98.