Sterling slumps by 1% amid political turmoil

The British pound dropped over 1% to fall below $1.36 on Wednesday, marking one of its steepest one-day declines in recent months, as markets reacted to a wave of political turmoil and growing uncertainty surrounding the UK’s fiscal leadership. The selloff reflects deepening investor unease following a series of events that have cast doubt on the government's cohesion and its economic strategy.

Speculation intensified after Chancellor of the Exchequer Rachel Reeves appeared visibly emotional during Prime Minister’s Questions, raising questions about her future in government. The reaction came in the wake of a high-profile U-turn on a controversial welfare reform bill, which drew criticism from both opposition MPs and within Starmer’s own Labour ranks.

Notably, Prime Minister Keir Starmer stopped short of offering unequivocal public support for Reeves during the session, fueling media speculation about internal divisions and a possible resignation.

Although Downing Street swiftly denied any plans for Reeves to step down, and the Treasury attributed her demeanor to a private, non-political matter, the market response was swift and unforgiving. Traders viewed the episode as a potential signal of deeper fractures within the newly elected government, particularly concerning its ability to maintain fiscal credibility in a fragile post-Brexit, post-pandemic economy.

This latest episode comes on the heels of the government’s retreat from several key budgetary commitments, as it faces mounting pressure to balance fiscal responsibility with ambitious social and infrastructure spending promises. With limited fiscal headroom and heightened scrutiny from both domestic and international observers, investors fear that political instability—especially around the influential Chancellor’s role—could derail the UK’s economic reform plans and further strain public finances.

Adding to the pressure on sterling, Bank of England (BoE) policymaker Alan Taylor called for an acceleration of interest rate cuts, warning that the UK economy faces an increasing risk of a hard landing. Taylor pointed to sluggish consumer spending, stagnating real wages, and softening labor market indicators as signs that the current monetary policy stance may be too restrictive for a slowing economy. His comments bolstered expectations for imminent policy easing, contributing to downward pressure on UK yields and the pound.

The combination of political fragility, fiscal doubts, and shifting monetary policy expectations has amplified volatility in UK markets. Gilts saw a modest rally on safe-haven demand, while equities remained mixed amid concerns over the government’s ability to execute its policy agenda. Analysts warn that unless clarity is swiftly restored regarding Reeves’ position and the government’s fiscal direction, the pound may face further downside in the short term.

In summary, the sharp decline in sterling reflects a confluence of political drama and economic fragility, underscoring how sensitive the UK’s financial outlook remains to shifts in confidence—both from policymakers and the markets that watch them closely.