The Pound fell against the Dollar for a fourth day on Thursday and traded at 1.3337. The move followed growing instability in the UK cabinet and concern about a power vacuum that could lead to another fiscal crisis.
Health Secretary Wes Streeting resigned on Thursday, adding pressure on Prime Minister Keir Starmer. Labour Party calls for him to step down have increased after poor results in last week’s local elections.
Labour’s internal leadership dispute has raised concern about a messy leadership change. This has also increased fears that a new leader could weaken fiscal discipline and revive worries about a fiscal crisis.
The US Dollar stayed firm after new US data showed a resilient economy. Retail Sales and weekly Initial Jobless Claims were released on Thursday, alongside rising inflation pressures.
These conditions have increased expectations that the Federal Reserve may raise interest rates by the end of the year or in early 2027. In the UK, the economic calendar is light on Friday.
Attention is expected to remain on the summit between US President Donald Trump and China’s President Xi Jinping. Comments have been positive, but markets are waiting for details on trade deals or steps to reopen the Strait of Hormuz.
Given the pound’s continued slide, we see the path of least resistance for GBP/USD as being to the downside. The political instability in the UK is creating significant uncertainty, while the US dollar benefits from a strong economy and the prospect of higher interest rates. This divergence suggests positioning for further sterling weakness is the most logical approach.
The instability in Westminster is causing a notable spike in currency volatility, which presents a direct trading opportunity. One-month implied volatility for GBP/USD has already jumped to over 14%, a sharp rise from the 8% average we saw earlier this year. This makes buying sterling puts or put spreads an attractive strategy to profit from both the expected fall in price and the rising cost of insurance.
We have seen this playbook before, specifically during the fiscal crisis of autumn 2022. That period showed how quickly political chaos can translate into a currency collapse, with GBP/USD falling over 10% in a matter of weeks back then. The current fears of a fiscally irresponsible government taking power echo that event, suggesting a sharp move lower is a very real possibility.
The divergence in central bank policy is also becoming starker. While the Federal Reserve is now expected to hike rates due to resilient US growth, the Bank of England is in a bind. The latest UK inflation data from April 2026 showed a stubborn 3.2%, but the current political vacuum makes it nearly impossible for the BoE to tighten policy to support the currency.
Speculative positioning already reflects this bearish sentiment, which confirms the trend has momentum. The most recent Commitment of Traders report shows that net-short positions against the pound have increased by over 20,000 contracts in the last two weeks alone. This indicates that hedge funds are actively betting on a continued decline for the currency.
The upcoming summit between the US and China is a potential source of market-wide risk. A surprisingly positive outcome could temporarily weaken the safe-haven dollar and provide a brief lift for the pound. However, any such rally should be viewed as a selling opportunity, as it does not change the dire political and economic fundamentals weighing on the UK.
