GBP/USD selling has slowed while UK political uncertainty continues, with Prime Minister Starmer facing the possibility of a leadership challenge. Societe Generale expects support near the 100-day moving average at 1.3482, with another level at 1.3420, and resistance at 1.3660.
Calls for Starmer to set a timetable to leave by September have come from Labour MPs and four cabinet ministers, and he has rejected them. He is due to meet Health Secretary Wes Streeting ahead of the King’s Speech.
Political Risk And Sterling Levels
A threshold of 81 MPs has been reached, meaning a leadership challenge could be launched at any time, with timing set by the NEC. Streeting’s allies see a limited period to contest before Andy Burnham returns to Parliament.
Markets showed mixed moves in gilts, with the 10-year yield at 5.06% in early trading, down 7.5bp from the prior day’s intra-day high. The 30-year yield reached 5.814%, the highest since 1998.
Pricing for the June MPC meeting has not changed since the election last Thursday. Markets are pricing in 10bp for next month.
The leadership challenge against Prime Minister Starmer is creating significant uncertainty, which has put a temporary floor under the pound. We are seeing GBP/USD selling pause as traders weigh this political risk against steady expectations for the Bank of England’s June meeting. This tension between politics and monetary policy creates an ideal environment for volatility trading.
Given this backdrop, we see value in buying volatility on Cable through options. A messy leadership contest could trigger a sharp sell-off, while a resolution could cause a relief rally, making long straddle or strangle positions attractive. Implied volatility for one-month GBP/USD options has already climbed from around 7% to over 9.5% in the past two weeks, showing the market is bracing for a significant price swing.
Options Strategy And Key Catalysts
This situation brings back memories of the market turmoil seen in 2022. Back then, a sharp spike in Gilt yields preceded a historic collapse in sterling, and with 30-year yields now hitting 5.814%, the highest since 1998, we see similar warning signs of market stress. History shows that when UK bond markets become this unsettled, a major currency move often follows.
Despite the political noise, the market is not backing away from a Bank of England rate hike next month. With UK core inflation remaining stubbornly high at 3.8%, well above the 2% target, policymakers may feel they have no choice but to tighten policy further. This provides a potential counterforce to political weakness, supporting the case for a two-sided market.
We will be watching the key support level at the 100-day moving average around 1.3482 very closely in the coming days. The King’s Speech is the next major catalyst, and any sign of weak authority could see this support break decisively. A strong performance, however, could see Cable rally back towards resistance at 1.3660, making option positions structured around this event timely.
