EUR/GBP rose as political uncertainty increased in the UK. More than 90 MPs called for Prime Minister Starmer to resign, while four ministers stepped down.
Up to 80 Labour MPs also called for Starmer to resign, and six ministerial aides quit. Markets reacted to the prospect of a leadership change and possible shifts in policy.
Political Risk Drives Sterling Weakness
Bond markets priced in the risk of looser fiscal policy under a new leadership. As a result, 30-year Gilt yields reached their highest level since 1998.
Markets also moved towards pricing a more hawkish Bank of England stance. Prediction markets put the chance of Starmer leaving office at around 70% by June and 85% by year-end 2026.
The article was produced using an artificial intelligence tool and reviewed by an editor.
The intense political uncertainty in the UK is weakening the pound, and we expect this trend to continue in the coming weeks. EUR/GBP has already broken through the 0.8750 resistance level as markets react to the instability within the government. This situation creates clear opportunities for traders positioned for further sterling downside.
Trading Implications And Strategy
With the chance of the Prime Minister resigning by June now seen as high as 70%, we see volatility as the main theme. The 3-month implied volatility for GBP options has surged to over 12%, a level we have not seen since the budget turmoil we witnessed back in 2022. Buying options, such as EUR/GBP calls, can be a prudent way to gain exposure while capping potential losses.
Bond markets are signaling distress, with the UK 10-year Gilt yield topping 4.85% on fears of a looser fiscal policy from a new leader. This market reaction is forcing traders to price in a more aggressive, hawkish stance from the Bank of England to combat potential inflation. This suggests shorting Gilt futures or positioning for higher short-term rates could be profitable.
We are seeing a familiar pattern that reminds us of past political crises. Looking back from our perspective in 2025, we saw similar sterling weakness during the multiple leadership transitions of 2022. The market’s reaction now is consistent with those episodes, suggesting a well-established playbook for trading UK political risk.
