Doubts over Keir Starmer’s premiership have been a repeated source of weakness for the pound over the past year, but GBP is now facing fresh pressure as Labour’s catastrophic losses in the May local elections threaten to trigger a full-blown leadership crisis.
If the crisis escalates or the uncertainty drags on, Sterling could continue to face headwinds in the short-to-medium term. Markets will be keeping a close eye on how things unfold.
Below, we look at three possible scenarios and how they could impact the pound, starting with the outcomes that currently appear most likely.
Scenario one: Starmer survives, for now
The least disruptive outcome for the pound would likely be Starmer surviving the immediate pressure and reasserting control over the party. This would remove the near-term risk of a leadership contest and could allow Sterling to recover if investors believe the government can refocus on its economic agenda.
In this scenario, we could see a tentative recovery in the pound as political uncertainty fades and stability returns.
However, any recovery may be limited if markets see Starmer’s position as weakened rather than secure. If leadership speculation continues, the pound could remain vulnerable to renewed bouts of volatility, with the autumn budget potentially proving the next test for the embattled Prime Minister.
Scenario two: Streeting resigns and launches a leadership challenge
If reports that Wes Streeting could resign and launch a leadership challenge prove accurate, this would likely be the most immediate source of volatility for the pound. As a senior cabinet minister, Streeting stepping down would suggest the crisis has moved beyond private pressure and into open confrontation.
For markets, the concern would be the appearance of instability at the top of government. A live leadership contest could make the UK’s economic direction harder to price, particularly if candidates signal different approaches to tax, spending, borrowing, regulation or public-service reform.
Streeting may be viewed as one of the more market-friendly Labour figures because of his reputation for pragmatism, reform and fiscal discipline. However, the process of challenging a sitting Prime Minister could still weigh on Sterling, especially if it exposes deeper divisions within the Labour Party.
The pound would be particularly vulnerable if investors believe the contest could become prolonged, divisive, or increase pressure for a general election.
Scenario three: Starmer agrees to a managed transition
A managed timetable for Starmer’s departure would likely be the least disruptive scenario in which the Prime Minister stands down, although it looks increasingly unlikely as Starmer has vowed to stay on.
For markets, the appeal of this scenario would be process and predictability. A clear timetable could reduce the risk of a sudden political vacuum and give investors more time to assess the likely candidates, their economic priorities and the implications for fiscal policy.
However, even an orderly transition would not remove uncertainty completely. Sterling would likely still face pressure while candidates are assessed, policy positions become clearer and markets judge whether the next leader can restore stability.
Who could challenge or replace Starmer, and what would markets watch?
While a number of MPs could step forward in a leadership contest, the two main contenders are Wes Streeting and Andy Burnham. Markets would be concerned with what policies any candidates advocate, and whether they could provide renewed stability moving forward.
Wes Streeting
The current health secretary has long been seen as a potential leadership contender, and recent reports suggest he could be preparing to challenge Starmer. Streeting is on the Labour right, with his politics often focusing on pragmatism and reform rather than ideology.
For the pound, this makes him a relatively market-friendly option, particularly if he presents a vision of Labour that is disciplined, pro-business and fiscally responsible.
However, such an approach would likely ruffle some feathers among the Labour left and could lead to ongoing internal divisions.
Markets may be wary of whether Streeting has the authority and popularity to lead an increasingly fractious party. Any fresh signs of instability later on could present renewed risks to the pound.
Andy Burnham
According to YouGov, Andy Burnham is currently the most popular Labour politician. His approval rating is 35%, compared to Starmer’s 19% and Streeting’s 16%, making the Greater Manchester Mayor one of the most prominent potential successors.
However, Burnham is currently unable to run for leader as he’s not an MP. In order to run, he would need to find a route back to Westminster.
Burnham could also be a double-edged candidate for Sterling. On the positive side, his popularity among the public and fellow politicians is a huge asset. If investors believe he can stabilise the government, reconnect with voters and put forward a credible growth plan, the pound might not react badly.
But Burnham may also carry more policy uncertainty than Streeting. He is on the soft left of the party and is more likely to run as a force for change, rather than continuity. His agenda could imply a bigger shift on tax, spending, regulation, devolution and public ownership. Markets may be concerned about higher borrowing and adjusting to a notable change in direction.
Other notable candidates
Former deputy leader Angela Rayner and former Labour leader Ed Miliband are two other high-profile figures who could put their names forward if the party undergoes a leadership contest.
Both are associated with the party’s soft left, which could prompt markets to watch closely for any signs of a looser approach to tax, spending or borrowing.
What does this mean for people and businesses sending money overseas?
Renewed political uncertainty could make the pound more unpredictable over the coming months, with GBP poised to weaken if the leadership crisis escalates. Exchange rates could move sharply as markets react to leadership rumours, policy signals, polling data or speculation over a possible election.
For personal clients, this could affect the cost of moving money overseas, whether that’s to buy property abroad or repatriate income. When transferring large sums, even a small movement in GBP exchange rates can make a meaningful difference to the final amount received.
Meanwhile, Sterling volatility can complicate budgeting and cash-flow planning for businesses with FX needs. Companies that import goods, pay overseas suppliers, receive revenue in foreign currencies or manage international payroll may find that sudden shifts in the pound affect costs, margins and profitability.
Protecting yourself from GBP volatility
Amid the uncertain outlook and heightened risk of volatility in the pound, there are steps you can take to protect your upcoming currency transfers.
Tools like forward contracts, market orders and rate alerts can help you manage exchange rate risk. Likewise, getting guidance and regular updates from a currency expert can help you understand what’s going on in the market and make a more informed decision about when to transfer.
If you want to find out more about the transfer options we offer, as well as get access to market updates and support from an account manager, get in touch with Currencies Direct or open a free account online.
