Sterling weakened as calls increased for Prime Minister Keir Starmer to resign, after a stronger earlier session. Betting markets are pricing a high chance that he leaves office this year.
A small political risk premium has appeared in EUR/GBP, alongside the rise in UK political uncertainty. A model estimate puts this at about 0.3% short-term overvaluation.
Attention is shifting towards possible leadership successors, which could add further pressure on sterling. Recent reports said Andy Burnham may seek a parliamentary seat to support a leadership bid.
Sterling also faced pressure amid concerns about proposals to abandon the fiscal rule. This has raised questions about the credibility of fiscal policy and the framework for UK public finances.
We recall seeing the political risk premium emerge in the pound during the leadership turmoil of 2025. Those initial concerns proved valid, as the subsequent change in leadership has kept sterling on the defensive. Now, with the pound trading weakly against both the euro and the dollar, the market’s focus is squarely on the new government’s fiscal credibility.
The warnings from last year about abandoning fiscal rules have partially materialized under the new administration. As Prime Minister Burnham settles into office, 10-year gilt yields have remained elevated, hovering near 4.5%, a noticeable increase from the sub-4% levels seen before the leadership challenge intensified. This shows the bond market is still demanding a premium for the added uncertainty surrounding UK public finances.
Given this backdrop, traders should consider positioning for continued sterling weakness, especially against the dollar. With the GBP/USD exchange rate struggling to sustain any momentum above 1.22, buying put options can provide a hedge against a further slide. This strategy offers a defined-risk way to profit if concerns over the UK’s fiscal path escalate in the coming weeks.
Implied volatility in sterling pairs has also drifted higher, reflecting the ongoing political uncertainty. The 3-month implied volatility for GBP/USD is currently around 8.2%, up from closer to 6.5% during calmer periods last year. This environment makes selling out-of-the-money call options an attractive strategy to collect premium, based on the view that any rallies in the pound will likely be short-lived.
Looking ahead, we are watching for the Chancellor’s upcoming Autumn Statement preview for any signals on spending priorities. Any indication of a significant departure from previous fiscal anchors could trigger the next major move in the pound. Traders should therefore remain nimble and prepared for increased price swings around key political announcements.
