Sterling nudges lower as Starmer's future in question

The British pound pulled back slightly on Monday ​as markets weighed any potential fallout ​from local elections that saw British Prime ‌Minister Keir ​Starmer's Labour Party suffer heavy losses last week.

While Starmer vowed to stay in office on Friday, speculation over potential leadership challenges ramped up over ‌the weekend following the election. A growing number of his own lawmakers have turned on him in recent days. In a speech on Monday, Starmer sought to quell the mounting rebellion in his party by saying he ‌would prove the doubters wrong and reiterating that he would stay in power.

"I know that people ‌are frustrated by the state of Britain. Frustrated by politics, and some people frustrated with me," he said in a speech in London. "I know I have my doubters and I know I need to prove them wrong. And I will," he said. Sterling ⁠was last ​down around 0.2% at $1.3602, ⁠having risen around 0.6% on Friday. Against the euro, the pound was last a touch lower at 86.51 pence.

The U.S. dollar ⁠was meanwhile broadly steady. The relatively calm market reaction to the election results suggests that Labour's rout had been priced ​in by markets to some extent, Kenneth Broux, head of corporate research for FX and rates at ⁠Societe Generale, said.

"The question now is what happens? Is there somebody else who's going to come in to take over from ⁠Starmer? ​Who is that person going to be? Is he or she more to the left?" UK markets have been on edge about potential leadership challenges to Starmer, as the likely replacements may be more left-wing ⁠and therefore may increase spending.

Broux said that the current backdrop was "not really ideal" for the pound due ⁠to both the political ⁠situation and seasonal factors. Lengthy questions over leadership could also spell trouble for the currency, he added, saying that "we could see a bit more sterling weakness on ‌a relative basis ‌compared to other countries in G10".

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