GBP/USD drew sellers in Asian trading on Friday, easing to around 1.3365 as Sterling weakened against the US Dollar. The move was linked to UK political uncertainty and risk-off market conditions.
Health Secretary Wes Streeting resigned, citing a loss of confidence in Prime Minister Keir Starmer. Starmer has faced unrest in the Labour Party after poor results in local elections in England and parliamentary elections in Scotland and Wales last week.
On Thursday, GBP/USD fell 0.9% and broke below 1.3500, sliding from session highs to near 1.3395. The pair followed a multi-week downtrend from an early-March peak and closed near the day’s lows.
Political pressure on Starmer increased after Labour’s losses in the 7 May local elections, with four cabinet ministers resigning this week, including Safeguarding Minister Jess Phillips. Nearly 100 Labour MPs called for Starmer to resign or set a departure timeline, while 111 MPs signed a statement of support.
UK data did not support the Pound: Q1 GDP rose 0.6% QoQ and 1.1% YoY versus a 0.8% forecast. March Manufacturing Production rose 1.2% MoM versus a -0.2% consensus.
UK Claimant Count Change, Employment Change, and Average Earnings are due next Tuesday.
We are reminded of the market dynamics from this time last year, in May 2025, when political turmoil can completely overshadow strong economic fundamentals. We saw the Pound fall sharply against the Dollar, breaking below 1.3400, despite UK GDP and manufacturing data beating all forecasts. The driver then was a crisis within the Labour party, proving that political stability is paramount for currency traders.
This historical lesson is highly relevant today, as we now see growing uncertainty around the Conservative party’s leadership ahead of the general election scheduled for next year. Recent polling from Ipsos this month shows the government’s approval rating has fallen to 27%, its lowest level since the last leadership change. This backdrop suggests any negative political headlines could easily trigger a sell-off, just as we saw in 2025.
For derivative traders, this means we should anticipate a rise in implied volatility in the coming weeks. Strategies that benefit from sharp price movements, regardless of direction, like buying straddles or strangles on GBP/USD, could be prudent. It is also a critical time to use options to hedge any existing long positions in Sterling against sudden political shocks.
Looking at historical data, the CBOE British Pound Volatility Index (BPVIX) jumped over 15% during that week of political chaos in May 2025. The index is currently hovering at a relatively calm 9.2, but the political undercurrents suggest it is undervalued and could easily spike towards the 11-12 level on any hint of a leadership challenge.
The US side of the currency pair reinforces a cautious stance on the Pound, as recent US inflation data for April came in at a stubborn 3.6%, slightly above expectations. This has kept the Federal Reserve from signaling any rate cuts, maintaining the Dollar’s strength. This divergence in economic policy outlook creates a fundamental headwind for GBP/USD.
Therefore, our focus should be on political headlines from the UK, which will likely have a greater impact than the upcoming economic data releases. Any break below the key 1.3300 psychological support level could trigger significant further downside. Traders should be prepared for swift moves and manage their risk accordingly, as sentiment is currently a more powerful driver than economic figures.
