GBP – Sterling unsettled by Starmer leadership rumblings

Reports of potential moves to oust Prime Minister Keir Starmer have kept sterling under pressure, as political uncertainty once again weighs on the currency.

Sterling is highly sensitive to instability at the top of government, and any credible effort to replace Starmer and Chancellor Rachel Reeves with figures from Labour’s more left-leaning wing would unsettle markets further. Bloomberg reported overnight that Starmer allies have been attempting to head off a possible challenge from Health Secretary Wes Streeting, though a spokesperson for Streeting dismissed the claims as “categorically untrue.”

Speculation over the Labour leadership is not new. Back in September, rumours circulated that Manchester Mayor Andy Burnham was positioning himself as a possible successor. With Labour’s national polling now languishing below 20%, and further tax rises expected in the coming Budget, the party’s internal tensions appear to be intensifying.

For the pound, two factors stand out. First, the currency tends to react poorly to political upheaval, as seen during the prolonged Brexit negotiations. Second, a shift towards Labour’s populist left would likely bring looser fiscal discipline and greater borrowing, potentially undermining investor confidence. Burnham, for instance, has publicly called for large-scale borrowing to fund social housing.

This backdrop compounds existing concerns over the fiscal position. Reports suggest Chancellor Reeves may need to find around £30 billion in savings or additional taxation to plug a widening hole in the public finances. Against this setting, sterling continues to struggle.

GBP/EUR remains pinned close to two-year lows around 1.1340, with the risk of a fresh move lower in the near term. GBP/USD is consolidating at 1.3170, just above recent multi-week lows at 1.3020. The euro’s recovery has seen EUR/GBP back above 0.88, helped by yesterday’s disappointing UK unemployment data. Despite doubts surrounding the Labour Force Survey’s reliability, the figures added to sterling’s woes.

The prospect of a leadership challenge to Starmer after the Budget later this month could inject further political risk into the mix. While Starmer’s personal ratings are weak, his removal would raise questions over the future of Reeves and fiscal policy direction. With markets already fretting over tighter budgets and softer growth, political turbulence could easily push EUR/GBP towards the 0.8870–0.8900 area.

USD – Government shutdown resolution in sight

US Treasury yields eased on Tuesday, and the dollar softened after ADP employment data showed the private sector shedding around 11,000 jobs per week in October. Markets continue to price roughly 16 basis points of easing for December, implying a 65% probability of a Federal Reserve rate cut.

Asian equities traded higher overnight, buoyed by weaker US job numbers and renewed optimism that Washington is close to reopening federal agencies. The Senate has passed a temporary funding bill that now awaits approval from the House of Representatives. If signed into law, the measure would keep most departments running until late January, with others funded through to September.

Once the shutdown formally ends, attention will swiftly turn to the release of delayed economic data. The resumption of official reporting should give investors a clearer sense of the US growth picture and help shape expectations for Fed policy into year-end.

From a market perspective, a confirmed reopening would likely boost risk appetite. Equity indices such as the S&P 500 could extend their recent gains—the index is already up 1.5% this week—while safe-haven assets such as gold and government bonds might come under mild pressure. The dollar could find modest support in a general “risk-on” rebound, although the extent of the move will depend heavily on the tone of incoming data.

EUR – Euro benefits from dollar softness

The euro has held its ground this week, largely supported by a slightly weaker dollar rather than domestic developments. The latest German ZEW expectations index for November was underwhelming, although the broader eurozone measure showed a mild improvement, suggesting Germany may be increasingly out of step with the rest of the bloc.

With no significant eurozone data due today, the focus shifts to comments from European Central Bank speakers. Isabel Schnabel is scheduled to address the conference Europe Reimagined: The Path to Empowerment at 12:30 CET. Her remarks are expected to touch on the need for deeper integration and structural reform across the bloc—an issue we have discussed previously.

EUR/USD is holding comfortably near 1.16, though a move decisively higher would likely require another round of softer US data. For now, the pair appears content to trade within its current range as investors await confirmation that the US government shutdown has indeed come to an end.