GBP Weakens Against Euro as UK Politics Shake Markets

Key Moments

Political Shock Pressures Sterling

The pound is on track for a fourth consecutive weekly decline against the euro as mounting political instability inside the Labour Party weighs on UK assets following a dramatic by-election upset in Gorton and Denton.

The pound to euro exchange rate (GBP/EUR) came under renewed selling pressure on Thursday, sliding further to 1.1422. While UK government bonds have so far avoided sharp or disorderly moves, the political backdrop has become more troubling for investors trying to identify short-term upside for sterling or gilts.

Labour’s loss of what had been one of its top-ten safest seats has deepened unease about the future direction of British politics, with growing expectations that the party could shift further to the left.

Market Reaction: Caution Without Panic

Despite the scale of Labour’s defeat, both the pound and gilts have so far reflected caution rather than outright panic. The absence of immediate market dislocation has not, however, reduced concern about how events inside Labour could evolve.

“This is only the morning after the night before. A lot depends on how Labour MPs move over the 24hrs. A concerted attempt to remove Starmer would be negative for sterling and gilts,” says Neil Wilson, UK Investor Strategist at Saxo.

For currency and bond investors, the key issue is whether the political fallout leads to a change in fiscal stance or leadership uncertainty that alters perceptions of UK policy credibility.

Labour Party Fault Lines Exposed

The by-election result is being viewed as a pivotal moment for Labour’s internal balance of power. Andrew Neil, the veteran British journalist, argues the defeat has revealed deep structural tensions within the party.

“There will be panic in Labour ranks now that its Left has been exposed, with two-thirds of Labour parliamentary Labour Party and most of the Cabinet now at risk,” he says.

He adds that the outcome could drag Labour further to the left, “or, more likely, result in his replacement by the Soft Left (now in the Labour driving seat) by someone who is proper Left. A new phase in British politics has begun.”

Such scenarios raise questions about the future policy mix, particularly regarding public spending, taxation, and the broader approach to fiscal discipline – all of which are closely tracked by FX and fixed income markets.

Fiscal Direction Becomes Central Risk

For financial markets, the central concern now is the fiscal trajectory that might emerge from any reshaping of Labour’s leadership or policy platform. A move toward significantly more expansive public spending, or any leadership outcome that is perceived to weaken fiscal responsibility, would likely lead investors to demand a higher risk premium on sterling and UK government debt.

ITV political editor Robert Peston frames Labour’s performance as a critical turning point. “So what follows from Labour’s Gorton catastrophe?” he asks, arguing that the implications of “the trouncing of Labour in Gorton and Denton” are twofold.

“First, the pressure for a massive overhaul of Labour’s political positioning and policies will become irresistible.

“Second, Starmer’s own credibility is now so damaged that he will struggle to recover.”

Green Party Surge and Fiscal Concerns

Markets are also paying close attention to the rise in support for the Green Party, whose agenda features substantially higher public expenditure. This development is reinforcing investor anxiety around the UK’s long-term fiscal path.

Susannah Streeter, Chief Investment Strategist at Wealth Club, says the potential fiscal impact could persist.

“Given the surge in support for the Green party, which promises a huge expansion of public spending, concerns will stick around future fiscal responsibility in the UK. While one by-election doesn’t point to electoral success, the win is likely to increase pressure on Keir Starmer to step down and if this occurred his replacement in the Labour party is expected to be more left-leaning with a looser hand on the public purse.”

Current Market Posture and Outlook

For now, the market tone around sterling and UK government bonds remains one of guarded caution rather than full-blown risk aversion. The absence of a disorderly gilt sell-off suggests investors are still waiting for clearer signals from within Labour before materially adjusting their positions.

However, as political uncertainty rises and the anticipated policy direction in the UK appears to be shifting leftward, the scope for a meaningful rebound in the pound looks limited. Until there is greater clarity on Labour’s leadership and fiscal stance, investors may remain reluctant to re-engage aggressively with sterling or UK fixed income.

GBP/EUR Snapshot