TD Securities analysts say Prime Minister Keir Starmer is likely to be replaced by late September, with a Labour leadership contest expected to begin in late June. Names linked to the race include Andy Burnham, Wes Streeting, Angela Rayner and Ed Miliband.
They expect Labour to move leftwards over time. They say this could mean higher public spending and higher taxes, while still keeping some form of the party’s fiscal rules.
They add that borrowing could rise if defence spending is exempted from the rules. They also expect Chancellor Rachel Reeves to be replaced when Starmer leaves.
They note Labour’s current majority is 165 seats, which leaves the party secure in Parliament. They say this makes an early general election less likely.
They do not expect an election before 2028 at the earliest. They say an election in 2026 or 2027 is unlikely, and that 2028 would depend on poll conditions.
Our long-held view from last year that PM Starmer would be replaced is now the reality we are trading in. The shift in leadership to Prime Minister Rayner in late 2025 has started to move the Labour party leftward, just as we expected. This has created a new landscape of political uncertainty for UK assets.
The bond market has been the first to react to the new government’s tone on fiscal policy. Since the change in leadership, UK 10-year gilt yields have risen from around 3.9% to over 4.4% on fears of higher spending and borrowing. We see this as a direct consequence of the anticipated departure from the stricter fiscal rules of the previous chancellor.
This political shift has also weighed heavily on the pound sterling. The GBP/USD exchange rate has fallen from over 1.29 in mid-2025 to trade near 1.23 as international investors price in a higher UK risk premium. The prospect of increased taxes and a more interventionist government continues to be a significant headwind for the currency.
For derivatives traders, the key takeaway is the sustained rise in implied volatility. Volatility on sterling currency options has climbed nearly 25% since last autumn, and FTSE 100 volatility is also elevated, reflecting uncertainty around future corporation and capital gains tax policies. This suggests that hedging strategies and positions that benefit from price swings will remain relevant.
With the new Prime Minister enjoying a large parliamentary majority, we stand by the view that an early general election before 2028 is highly improbable. This means traders should prepare for this environment of simmering policy uncertainty to persist. We should not expect a return to the political calm of early 2025 anytime soon.
