Prime Minister Keir Starmer has come under growing political pressure after Morgan McSweeney, a close ally and former chief of staff, resigned on Sunday. McSweeney stepped down following revelations about his involvement in the contentious appointment of Peter Mandelson as the United Kingdom's ambassador to the United States last year.
The appointment itself is now facing additional official scrutiny, a development that has placed Starmer's decision-making under closer examination. Officials and political observers are watching how the scrutiny unfolds as the prime minister prepares for a by-election at the end of February and a slate of local elections in May, events that are likely to intensify domestic political debate.
Market-watchers are already reacting to the heightened political uncertainty. ING analysts have identified potential downside pressure on both the pound sterling and UK government bonds, commonly known as Gilts, as traders and investors assess the possibility of leadership changes at 10 and 11 Downing Street. ING's analysis links market moves to evolving speculation about the stability of the prime minister's position.
Analysts at ING say the pound is vulnerable amid this political backdrop and the Bank of England's recent tone. At last week's Bank of England meeting officials adopted a dovish stance, a factor ING views as compounding the currency's weakness. In ING's scenario, the EUR/GBP rate could initially target the 0.8740/45 area and may move toward 0.8800 if market conjecture intensifies around a potential resignation by Starmer.
The combination of political questions at the highest levels of government and a central bank tone viewed as accommodative has prompted forecasters to flag risks for both foreign exchange and sovereign debt markets. How the upcoming by-election and the May local polls play out, and how official inquiries into the Mandelson appointment proceed, will be watched closely by investors assessing short-term risk to sterling and Gilts.
Clear summary
Morgan McSweeney resigned on Sunday over his part in Peter Mandelson's appointment as UK ambassador to the US last year, triggering further official scrutiny and raising questions about Prime Minister Keir Starmer's judgment. ING analysts expect this political uncertainty, together with a dovish tone from the Bank of England at its meeting last week, to put downward pressure on the pound and UK government bonds, with EUR/GBP potentially moving from 0.8740/45 toward 0.8800 if speculation about Starmer's future grows.