The pound fell to a five?week low against the dollar on Tuesday, trading at 1.3301. The move reflected not only broad dollar strength amid a rise in risk aversion but also sterling weakness stemming from a deepening political crisis in the United Kingdom. The coming days are likely to determine whether Starmer retains the premiership or steps down, with significant implications for both UK politics and the pound.
The local elections on May 7 triggered severe turbulence within the Labor Party. Talk of a leadership change in the governing party has intensified. Sterling was under pressure both from the risk of a leadership change and from worrying signs of a rise in right?wing populism.
A key outcome of the local polls was the rapid advance of the right?wing Reform UK party, led by Nigel Farage. The party won nearly 1,500 local seats and gained control of a number of councils. Right-wing forces began displacing labor in its traditional working-class strongholds while also drawing support from conservative voters.
Weak local election results do not always precipitate a political crisis, but in this case several factors coincided. Since winning the parliamentary election, Starmer's government has faced weak economic growth, a cost?of?living crisis, and rising migration discontent — all amid a perception of an absence of a clear forward strategy. The poor local election outcome served as a catalyst, prompting many Labor MPs to publicly demand either Starmer's immediate resignation or the announcement of a timetable for his departure.
In the wake of the deepening political crisis, GBP/USD fell from about 1.3650 to the low 1.33 area within a few days.
Starmer has accepted responsibility for the election losses but has refused to resign and has vowed to fight to keep his job.
However, British media report conflicting accounts. The Daily Mail, citing senior sources, reported that the prime minister has privately indicated to close allies his intention to resign. Insiders say the party is already discussing a preferred date for such a step. Some call for an immediate resignation, while others urge waiting for the Makerfield by?election on June 18, in which Manchester mayor Andy Burnham is expected to stand and which some view as a potential litmus test for a successor.
At present the balance appears to favor waiting. Culture Secretary Lisa Nandy said that the prime minister will remain in office at least until the start of the parliamentary summer recess.
Reacting to that rhetoric, GBP/USD retreated from its lows and climbed back to the mid?1.33 area.
Despite that cautiously optimistic political signal, long positions in the pair remain risky.
First, Lisa Nandy's statement appears to be a conventional crisis?management communication intended to project government stability amid severe political turmoil. She also noted that the decision to stay or step down is "a deeply personal decision for Keir Starmer himself," indicating that even loyal ministers acknowledge the choice ultimately rests with the prime minister.
Second, a senior and high?profile minister, Wes Streeting, who led the Department of Health, has left the cabinet. He became one of Starmer's key internal critics and publicly called for the prime minister's resignation.
Given the persistent risk of further escalation of the political crisis in the United Kingdom, long positions in GBP/USD remain vulnerable.
Sterling may also face additional pressure from rising geopolitical risks. Axios reports that President Donald Trump is seriously considering a resumption of military action in the Middle East. Sources told the publication that the White House is seeking an agreement with Tehran but that Iran's refusal to meet many US demands has kept the military option on the table. President Trump is due to hold a Situation Room meeting on Tuesday to discuss possible military options. If an escalation occurs, GBP/USD would likely come under significant strain.
For these reasons, the current rise in the pair should not be trusted given the bleak fundamental backdrop. On the four-hour chart, GBP/USD sits between the mid and lower Bollinger Bands, beneath the Ichimoku cloud (Kumo) and below the Kijun?sen, but above the Tenkan?sen. Short positions become attractive if the pair falls back under the Tenkan?sen on the four?hour chart, below about 1.3360; that move would trigger a bearish Ichimoku "parade of lines" signal. In that case, the next downward target would be 1.3290 — the lower Bollinger Band on the four?hour chart. A further target would be the 1.33100 area.