Picture by Simon Dawson / No 10 Downing Street
Labour MPs are said to be plotting the Prime Minister’s removal.
Pound sterling was down across the board on Wednesday on news that senior members of the Labour Party are “manoeuvring” to replace Sir Keir Starmer as leader and Prime Minister.
Numerous national news outlets report that Wes Streeting, the health secretary and Shabana Mahmood, the home secretary, are among those considering running for the leadership.
Both have denied the plot, but the news has shaken the office of the Prime Minister, who has committed to fight any challenge to his leadership after the budget or local elections next year.
Pound sterling is highly sensitive to political uncertainty and will not take kindly to any attempt to replace Starmer and Chancellor Rachel Reeves with a more left-aligned combination.
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“Sterling already has enough negative news,” says Chris Turner, head of FX research at ING. “A further negative today is news that PM Starmer could face a leadership challenge after the budget later this month.”
In July, the pound and UK bonds were sold on fears the Prime Minister was considering replacing finance boss Rachel Reeves, highlighting how sensitive UK assets are to fears of what a replacement would look like.
In September, fears of a challenge to Starmer’s leadership arose on reports Manchester Mayor Andy Burnham fancied himself for the job.
There’s clearly discontent in a party that is now regularly polling sub-20% nationally, and the significant tax increases set to be announced will unlikely improve Labour’s position.
Above: Politico’s Poll of Polls.
There are two immediate issues for the British pound:
1) It intensely dislikes political uncertainty, as exemplified by pound sterling’s weakness and sensitivities during the Brexit negotiation years.
2) Any replacement of Starmer or Reeves would likely come from the party’s populist left and would opt to spend and borrow more to try and steady Labour’s poll standings. For exmple, Burnham advocates for borrowing billions to build social housing.
This outcome poses a significant risk for the UK’s debt trajectory; the pound is already highly sensitive to developments on this front.
The pound had already been under pressure on concerns Reeves needs to find up to £30BN in savings and extra taxes to plug a black hole that has arisen in the country’s finances over the past year:
“Political risks, chiefly, take the form of a post-Budget personnel change, whereby the fiscal package is received so terribly, and the political fallout proves so brutal, that Chancellor Reeves does not survive in post – probably as, naively, PM Starmer attempts to save his own job,” says Michael Brown, Senior Research Strategist at Pepperstone.
📈 The pound to euro exchange rate has fallen steadily through the day to 1.1315 and looks ripe to break to plumb new depths in the coming days.
📈 The pound to dollar exchange rate dipped below 1.31 to 1.3087.
“Though Starmer’s approval ratings are very poor, his removal would create some doubt about the future of Chancellor Rachel Reeves and add some risk premium to UK asset markets,” says ING’s Turner. “Political noise could push EUR/GBP to new highs for the year in the 0.8870/8900 area.”
