Sterling Falls as UK Politics Outweigh Strong Growth Data

Key Moments

GBP weakened against both EUR and USD even after UK GDP rose 0.6% in the first quarter, the strongest pace since early last year.
MUFG flagged rising political uncertainty around Prime Minister Keir Starmer as a growing near-term downside risk for Sterling and gilts.
UK borrowing costs have already climbed sharply as investors reassess inflation risks, energy costs, and the likelihood of looser fiscal policy.

Market Snapshot: Key FX Rates

The British Pound declined against the Euro and the US Dollar, with traders shifting focus from stronger UK macro data to mounting political uncertainty linked to Prime Minister Keir Starmer.

Currency Pair	Rate	Move
Pound to Euro (GBP/EUR)	1.15389	-0.06%
Pound to Dollar (GBP/USD)	1.3516	-0.08%
Euro to Dollar (EUR/USD)	1.17134	-0.02%

Growth Surprise Fails to Lift Sterling

Analysts at MUFG observed that Pound Sterling has remained on a “softer footing” even after the latest UK GDP release showed the economy expanded by 0.6% in the first quarter, exceeding expectations and marking the fastest growth rate since early last year.

The bank pointed out that both household spending and corporate investment underpinned the result. Private consumption increased by 0.6%, while business investment advanced 0.7% over the period.

MUFG commented that, “Stronger UK cyclical momentum alongside higher UK yields and favourable conditions for carry trades have helped the pound to surprisingly outperform so far during the Middle East conflict,” but suggested that this support is now being tested by political developments.

Political Turbulence Weighs on Sentiment

Despite the positive economic backdrop, MUFG cautioned that the near-term outlook for Sterling is deteriorating as questions around Starmer’s leadership intensify.

“It has been reported that Prime Minister Keir Starmer could face a leadership challenge as soon as today,” the bank said, warning that heightened internal tensions within Labour are beginning to unsettle financial markets.

According to MUFG, investor nerves have been stirred further by reports that Health Secretary Wes Streeting may consider a leadership bid. The bank also drew attention to speculation involving Angela Rayner and Manchester mayor Andy Burnham, noting that party members appear increasingly receptive to figures associated with Labour’s “soft left.”

MUFG stated, “The survey indicates that a soft left Labour candidate is mostly likely to replace Keir Starmer if a leadership contest takes place,” and argued that such a development could amplify market worries about UK fiscal risks, potentially exerting additional downward pressure on both gilts and Sterling.

Rising Yields and Shifting Risk Calculus

The bank underscored that UK government borrowing costs have already moved sharply higher in recent weeks as market participants reassess inflation risks, elevated energy prices, and the possibility of more accommodative fiscal policy.

While expectations of higher Bank of England interest rates have underpinned the Pound in recent months, MUFG noted that analysts are increasingly debating whether escalating political uncertainty could start to overshadow that monetary-policy support.

Outlook: Energy Shock and Political Sensitivity

Looking ahead, MUFG suggested that a slowdown later in the year still appears probable, as the impact of higher energy costs stemming from the Iran conflict feeds through into the broader UK economy.

The bank added that the UK’s relatively strong initial position ahead of the energy shock may help moderate the extent of the deceleration. Even so, it emphasized that markets are becoming more reactive to signals from Westminster, with political headlines now playing a more prominent role in shaping the trajectory of Sterling and UK assets.