UK Political Uncertainty Weighs on GBP as Doubts Grow Over Starmer’s Leadership

Key Highlight

Ongoing headwinds continue to weigh on the pound

A pivotal week ahead for the US dollar with NFP and CPI in focus

Market Recap

Sterling faced renewed selling pressure last week as political and monetary headwinds resurfaced in the UK. Growing uncertainty around Prime Minister Starmer’s leadership, the approach of key by-elections, and a narrowly split Bank of England vote to keep rates unchanged weighed heavily on confidence. As a result, GBP recorded its sharpest decline against the euro since last summer, with options markets reflecting increased downside risk.

The US dollar strengthened over the same period, supported by stronger-than-expected US manufacturing data early in the week and a rise in longer-dated US Treasury yields, which boosted demand for the greenback.

In the euro area, inflation continued to cool, reinforcing a cautious stance from the European Central Bank in its latest policy update and limiting upside for the single currency.

Meanwhile, the Australian dollar outperformed after the Reserve Bank of Australia surprised markets with a more hawkish rate increase, prompting a reassessment of future policy expectations.

Market Overview:

Sterling opened the session on the back foot following renewed political developments in the UK. The resignation of Morgan McSweeney as chief of staff, linked to the appointment of Peter Mandelson as US ambassador, has added to uncertainty around Prime Minister Keir Starmer’s leadership, weighing on near-term GBP sentiment.

Looking ahead, UK growth data is expected to show a subdued end to 2025, with Q4 GDP likely reflecting softer momentum. While economic growth could improve into early 2026 as fiscal uncertainty eases and earlier rate cuts filter through, downside risks remain — particularly from labour market weakness and potential shifts within Labour’s leadership.

In Europe, upcoming trade figures are expected to highlight the impact of ongoing US tariffs, alongside signs that Chinese exports may increasingly be redirected toward the euro area, shaping trade balances and broader market sentiment.

Across the Atlantic, attention turns to key US data releases. Wednesday’s delayed January employment report is forecast to show modest job creation of around 70,000, with unemployment holding steady at 4.4%. Friday’s inflation data will be closely watched for confirmation on whether price pressures are easing, a crucial factor for future Federal Reserve policy expectations.

What this means:

With political risk weighing on sterling and major economic data due from both the UK and US, volatility is likely to remain elevated. Currency markets will stay highly sensitive to surprises in growth, inflation, and labour data, while trade developments and political headlines continue to influence short-term FX positioning.

9th February 2026

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