UK Political Crisis Deepens as US Inflation Looms — GBP, Gilt Yields & Dollar Markets in Focus

Key Highlight

• Political uncertainty in the UK intensified overnight as senior Labour figures publicly questioned Keir Starmer’s leadership, increasing pressure on Sterling and UK government bonds.
• Markets are closely watching today’s US inflation data, with CPI forecast at 3.7% year-on-year as higher energy prices linked to Middle East tensions continue feeding into inflation expectations.
• Oil prices remained supported after Donald Trump described the Iran ceasefire situation as being on “massive life support”, reinforcing concerns over ongoing geopolitical instability.
• Rising gilt yields continue to weigh on GBP sentiment, with investors increasingly concerned that a change in Labour leadership could lead to looser fiscal policy and higher government borrowing.
• The Euro found support after ECB policymaker Robert Holzmann suggested further rate hikes may soon be necessary, helping maintain expectations for tighter Eurozone monetary policy.

Market Recap

Currency markets saw renewed volatility as geopolitical and political risks dominated sentiment. The US Dollar strengthened modestly after stalled US-Iran negotiations and renewed concerns surrounding the ceasefire supported oil prices and safe-haven demand. The USD Spot Index gained around 0.2%, while crude oil prices advanced roughly 0.7%.

Sterling remained under notable pressure amid a rapidly escalating political crisis within Labour. UK 30-year gilt yields climbed close to 10 basis points to 5.68% their highest level since 1998. As growing calls for Starmer’s resignation unsettled investors. Reports suggest more than 70 Labour MPs have now publicly called for leadership change, while several ministerial aides have resigned.

GBP/USD fell around 0.21% overnight as markets priced in additional political risk. Investor concerns continue to centre around the possibility of a more left-leaning Labour leadership, which could increase fiscal spending plans and drive further gilt issuance, echoing market fears seen during the 2022 Liz Truss period.

Meanwhile, the Euro stabilised after comments from ECB officials reinforced expectations that further tightening may still be required to contain inflation across the Eurozone.

Market Update

Attention today will centre on two major developments: the UK Cabinet meeting and the release of US CPI inflation data this afternoon.

For GBP, political developments remain the primary driver. Markets will be closely monitoring whether Starmer retains Cabinet backing, as any further resignations or leadership pressure could significantly increase volatility for Sterling and UK bonds. Speculation is already building around potential leadership contenders, including Andy Burnham, should a formal challenge emerge.

Later today, US CPI figures are expected to show headline inflation rising to 3.7% YoY. A stronger-than-expected reading could reinforce expectations that the Federal Reserve may need to maintain higher interest rates for longer, particularly as energy costs remain elevated due to Middle East tensions.

In Europe, German ZEW economic sentiment data is also due this morning and is expected to weaken further, reinforcing concerns around slowing Eurozone growth alongside persistent inflation pressures ahead of the ECB’s June meeting.

13th May 2026

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