Britain on the brink of political change

GBP/USD

Key zone: 1.3150 - 1.3250

Buy: 1.3280 (on strong positive fundamentals) ; target 1.3450-1.35; StopLoss 1.3200

Sell: 1.3100 (on a decisive break above 1.3150) ; target 1.2950-1.2900; StopLoss 1.3180

The United Kingdom is changing prime minister again: Keir Starmer’s team has already begun handing over affairs to his successor, Andy Burnham. In addition to geopolitical risks and macroeconomic data, the market will soon be forced to assess the goals and methods of the new prime minister. Volatility across all British assets is already panicking.

Let us recall:

The situation became critical for Starmer after the May local elections, which turned into a painful defeat for Labour. As a result of the vote, the party lost more than 1,200 local council seats and dozens of municipal councils.

The Labour Party lost support in two electoral directions at once: part of the electorate “moved right” to Reform UK, while another part moved left to the Greens. This result triggered a deep internal party crisis and launched public processes to remove the party leader from the post of prime minister.

From the point of view of foreign policy, Labour’s line will remain the same: countering Russia plus rapprochement with Europe, as far as possible in the post-Brexit era.

The external backdrop did not create the crisis from scratch, but it made it more expensive and more dangerous. On June 18, the BoE directly indicated that the energy shock linked to the Middle East remains uncertain, while CPI, although it declined to 2.8%, may rise again later in the year due to the pass-through of higher energy prices. At the same time, the Committee emphasized the other side of the equation: the economy is weakening, and the labor market is softening. For the government, this is almost the worst possible combination — less room both for fiscal maneuvering and for intra-party concessions.

Information that the current head of government could be succeeded by Greater Manchester Mayor Andy Burnham appeared back in the spring. At that time, the pound reacted very negatively to the news. Burnham is perceived by the market as a politician who traditionally supports expanding public spending, especially in the social sector and healthcare, more active redistribution, and a less rigid attachment to fiscal constraints.

Naturally, traders view such a course as a risk factor for a wider budget deficit, increased government debt issuance, and additional pressure on UK government bond yields.

For the economy and markets, the main risk is not so much the change of name in Downing Street itself, but the uncertainty of the fiscal regime. The official macro baseline is already fragile:

• In March 2026, the OBR expected real GDP growth of only 1.1% in 2026;
• CPI at an average of 2.3% in 2026;
• unemployment peaking at around 5.3%;
• in June, the ONS recorded unemployment at 4.9%, a year-on-year decline in payrolled employees, and a weaker labor market;
• on June 18, the BoE kept the rate at 3.75%, but directly pointed to uncertainty caused by the Middle Eastern energy shock.

Against this backdrop, the political crisis works through the risk-premium channel: an investment pause, pressure on GBP, rising gilt yields, and a higher cost of future debt servicing.

For forex traders, the conclusion is pragmatic: GBP is becoming a scandal-driven currency, and it should be traded as an asset sensitive to political surprises. The best tactics are event-driven short-term trades after official statements, reduced position size, and strict risk control. A cautious bearish trend in GBP against EUR remains relevant if the crisis drags on, while against USD the dynamics may be more heavily distorted by the U.S. rate and the global dollar factor.

In addition to economic tasks, the new prime minister also has a political one: to try somehow to reset relations with Trump. But the chances of success in this process are still minimal.

So we act wisely and avoid unnecessary risks.

Profits to y’all!