London, United Kingdom. Amidst the leadership speculation, Prime Minister Keir Starmer on Tuesday met apprentices during his visit to South Bank Technical College, Nine Elms Campus. Picture by Lauren Hurley / No 10 Downing Street.
The Prime Minister looks better positioned on Wednesday as mutiny loses momentum.
The pound-euro exchange rate rises to 1.1540 in midweek trade as it becomes increasingly clear Prime Minister Keir Starmer does not intend to resign, and there's little anyone can do to change that. The pound-dollar rate rises to 1.3539 having been as low as 1.35 on Tuesday.
Gains by pound sterling follow signs Keir Starmer will stay in position as the push against him runs out of momentum, with mutinous MPs - about 100 of them - still facing a high bar to remove him.
Health Secretary Wes Streeting might call for the PM to resign later today, but he is not the favoured candidate amongst the left-leaning Labour Party. The favourite - Andy Burnham - still has a mountain to climb in that he needs to concoct a by-election to re-enter parliament.
Data crunching by the Telegraph shows that the only seat he would safely win is Bootle, and that means kindly asking its incumbent to step aside.
Starmer will meanwhile today introduce his legislative agenda to Parliament in what is known as the King's Speech. Next week, he is reportedly bringing forward the government's long-awaited defence spending review.
Above: GBP/EUR has seen relatively limited damage wrought by recent political events.
If he can regain the legislative momentum, his position becomes more assured.
For the pound, that's the least-bad outcome that would allow it to recover from bouts of weakness driven by the political uncertainty of recent days.
Of course, there's no guarantee that politicians will behave according to the expectations I have set out on this page and those with currency payments should be aware of what could happen if Starmer is removed.
After all, he is deeply unpopular with the electorate and a growing chunk of his own party. Betting odds of him leaving before year-end are a high 85%, according to Polymarket.
"Whilst it is expected that the King’s Speech and State Opening of Parliament today will bring a somewhat of a hiatus in the battle for the Labour leadership, out of due deference to the monarch, it doesn’t feel like political risk has been extinguished for the gilt market and GBP," says Sam Hill, Head of Markets Insights at Lloyds Bank.
Above: GBP/USD still remains primarily driven by the USD.
Elliott Jordan-Doak, Senior UK Economist at Pantheon Macroeconomics, says the "recent market reaction to the likely demise of Sir Keir Starmer looks fair."
"The gilt sell-off has further to run if Sir Keir Starmer is forced out of office in the next few weeks," he adds.
UK borrowing costs, as measured by bond yields (or gilts), have risen sharply in recent days to reflect anxiety about the rising political temperature.
That reflects fears that a change in direction would result in a government willing to borrow and spend more, which is inevitably inflationary.
"The bulk of MPs seem to want to shift leftwards, and more borrowing has been the path of least resistance in recent years," says Jordan-Doak.
Labour’s influential Tribune group of more than 100 MPs has called for less “caution” on fiscal policy in a new pamphlet that demands a change of direction to the left.
Above: The British ten-year gilt yield is at its highest level since 2008.
Louise Haigh, the Labour MP who chairs the group, says the current structure of the UK Treasury’s role in fiscal policy "resolved in favour of caution". Andy Burnham's supporters on Tuesday meanwhile caught the attention of the City saying the market would have to "fall in line" with the need to spend more heavily on social causes.
Mohamed A. El-Erian, Former CEO of bond investing giant Pimco, explains that fiscal discipline is even more important at a time when external (non-UK) developments are intensifying the economic and financial headwinds.
He says:
"The British Pound is under pressure... failing to find support despite a dramatic surge in yields. With the 10-year Gilt breaking above 5.10% and the 30-year yield hitting a level not seen since March 1998, the market is sending a clear signal that should serve as a sobering reminder: Convincing markets that fiscal stability will continue is a necessary condition to avoid a repeat of the 2022 'Liz Truss moment' that, among other things, pushed the UK pension system to the brink."