The British Pound rose on Monday as political pressure increased on Prime Minister Keir Starmer. The move extended recent gains for GBP.
Andy Burnham, who is challenging to replace Starmer, said he would not change Chancellor Rachel Reeves’ fiscal rules if he became Prime Minister. This statement came as the political situation drew more attention.
Politics Drives Sterling Sentiment
GBP/USD traded at 1.3414 after testing multi-week lows of 1.3302. The pair moved higher from that earlier low.
We’ve seen the Pound move higher as the market seems to prefer the certainty offered by Andy Burnham’s reassurances over the current instability. However, the underlying pressure on Keir Starmer means we should expect continued choppiness in the coming weeks. In fact, one-month implied volatility for GBP/USD has already climbed from around 7% to over 9.5% since late April, showing that options traders are bracing for bigger price swings.
This political uncertainty complicates the picture for the Bank of England, especially with the latest inflation figures showing core CPI is still stubbornly above target at 2.8%. Any sign of a leadership challenge that questions the current fiscal rules could force the Bank to delay planned rate cuts later this year. We are seeing this reflected in overnight index swaps, which have already pushed back the odds of an August rate cut from 60% to below 40%.
We all remember the market’s severe reaction to the fiscal surprises back in late 2022, which saw the pound plummet towards parity with the dollar. Burnham’s commitment to Chancellor Reeves’ rules is a direct attempt to soothe markets and avoid a repeat of that chaos. Even the minor leadership rumblings we saw in mid-2025 caused a notable dip in Sterling, reminding us how sensitive the currency is to political stability.
Trading And Risk Management
Given the rise in implied volatility, buying options is becoming more expensive, but it may be a necessary strategy to navigate the potential for sharp moves. A long straddle on GBP/USD, which profits from a large move in either direction, could be a prudent way to position for a definitive political outcome. This allows us to capture the upside if stability returns or protect against downside if the leadership crisis deepens before the party conference season.
For those trading futures, the recent low around 1.3300 now acts as a key technical and psychological support level. A confirmed break below that could signal a much deeper slide, as market confidence would be severely damaged. Conversely, a sustained move above the 1.3450 resistance level might suggest the market is fully pricing in a smooth political transition.
