GBP/USD has transitioned from a clear four-month uptrend into a volatile, politically influenced range. Following a rise to a 4½-year peak around 1.3870–1.3880 in January, the pair has encountered downward pressure, recording intraday lows close to 1.3533 and facing challenges in regaining the 1.3700 level. Each advance beyond 1.3680–1.3720 is met with selling pressure, indicating that sterling’s movements are influenced by factors beyond just rates and data. The market is currently adjusting its risk premium in response to developments in UK politics, particularly as the Mandelson–Starmer narrative unfolds and speculation regarding leadership grows stronger. The Bank of England finds itself confined within a limited range on the domestic macro front. The Bank Rate currently stands at 3.75% following a narrow 5–4 decision to reduce by 25 basis points in December. The committee indicates a gradual, data-informed approach instead of pursuing an aggressive easing cycle. The actual performance offers them no reassurance. Q4 growth appears to be essentially stagnant, and the services PMIs indicate a decline in the employment component since late 2024, with the most recent data highlighting the longest period of job losses in the sector in approximately sixteen years. The current headline CPI stands at approximately 3.4% year-on-year, which is still elevated enough to prevent the BoE from easing its stance. However, the internal projections indicate a decline in inflation toward 2% by spring, with expectations of stabilization near the target as regulated tariffs and tax adjustments take effect. The combination for GBP/USD presents challenges. The BoE is refraining from hiking rates to protect the currency; however, it also faces limitations in cutting rates to boost growth without jeopardizing its credibility. The divergence in policy compared to the Federal Reserve is no longer significantly benefiting sterling, which limits the potential for the pair to rise above the 1.38–1.39 range, even under favorable conditions.
The dollar side of the cross continues to be supported by solid fundamentals. The ISM non-manufacturing index is currently at 53.8, indicating a position in expansion territory and slightly surpassing expectations. Meanwhile, the prices-paid component has risen into the mid-60s, suggesting ongoing domestic inflationary pressures. ADP private payrolls growth has decelerated to approximately 22k jobs in the most recent monthly report, a decrease from 37k previously. However, this does not indicate a collapse; weekly initial claims, remaining slightly above the 200k threshold, affirm that the US labor market continues to demonstrate resilience. Federal Reserve officials are acting in a manner that aligns with anticipated expectations. They are resisting the notion of significant, premature reductions and emphasizing the threat of persistent inflation instead of a decline in employment. As long as that position remains intact, the dollar maintains support for DXY and hinders GBP/USD from reclaiming the 1.39–1.40 range solely based on expectations of rate cuts. This week’s structural shift for sterling is driven by political factors rather than macroeconomic ones. Recently disclosed Epstein files indicate that Peter Mandelson, who was appointed as US ambassador in 2024, had exchanged sensitive information with Jeffrey Epstein and continued to maintain contact following Epstein’s conviction. This event led to Mandelson stepping down from both Labour and the Lords, subsequently paving the way for a criminal inquiry regarding potential misconduct in public office. The key takeaway for GBP/USD is that Keir Starmer has acknowledged his awareness of Mandelson’s ongoing relationship with Epstein at the time he sanctioned the appointment. The admission sparked outrage among Labour MPs, igniting discussions of betrayal, and swiftly placed his leadership on a countdown clock. As those headlines emerged, GBP/USD moved away from the 1.37 region and was driven down into the low-1.35s, experiencing a significant test around 1.3533 as positions were adjusted. Gilt yields surged to their peak levels since late 2025, indicating that investors are seeking a greater risk premium to maintain UK duration amid uncertainties surrounding the government’s future.
The current pricing in the betting markets is now consistent with the reaction observed in the foreign exchange market. The likelihood of Starmer exiting Downing Street in 2026 has significantly decreased from a near 50/50 chance to approximately 1/3, suggesting an implied probability of about 70% for a departure this year. Over ninety percent of the latest wagers are leaning towards the outcome of “Starmer gone in 2026.” The significance for GBP/USD lies in the transition from a theoretical leadership uncertainty to a situation where the market must identify specific successors and define their fiscal and regulatory characteristics. While the likelihood of a 2026 exit remains at those levels, the currency will continue to reflect a political discount compared to its peers, especially given the BoE’s constrained ability to mitigate this with any unexpected hawkish moves. The forthcoming inquiry for the FX market is straightforward and unforgiving. If Starmer were to step down, who would succeed him and what implications would that have for fiscal policy? Angela Rayner, Wes Streeting, Ed Miliband, and external challengers like Nigel Farage occupy various positions along the fiscal spectrum. A government led by Rayner is viewed as more inclined to advocate for increased public investment and a more relaxed approach to borrowing. The current profile, in conjunction with a delicate gilt market, is likely to compel investors to increase the UK risk premium, suggesting a lower baseline for GBP/USD, especially if global risk sentiment continues to be unstable. A Streeting-type outcome suggests greater consistency with the current fiscal frameworks. He is perceived as more inclined to maintain the Treasury’s structure, engage directly with markets regarding discipline, and strive to refocus the discussion on growth instead of a spending surge. In that context, the political discount on sterling may decrease once the succession is resolved. Ed Miliband garners substantial backing from the party base, yet his past actions in 2015 remain etched in the memory of the bond market. In contrast, Nigel Farage embodies an entirely distinct trajectory, where Reform UK transforms favorable polling into parliamentary seats, reigniting fundamental discussions regarding the UK’s ties with Europe and its enduring regulatory framework.
The hierarchy for GBP/USD is clear-cut. A perceived shift in leadership towards Rayner or a comparable figure presents the greatest risk for sterling. A technocratic continuity profile like Streeting’s presents a lower level of threat. An unpredictable result featuring early elections and a more robust performance from Reform would reintroduce “UK exceptional risk” as a key factor in FX pricing, potentially warranting a significant decline beneath 1.35. Prior to the escalation of the scandal, significant financial institutions had outlined a fairly narrow trading range for the year. JP Morgan anticipates GBP/USD will fluctuate between 1.36 and 1.39, while cautioning that a significant move towards more expansionary leadership may lead to a more pronounced sell-off. Goldman Sachs stands at approximately 1.36, contending that sluggish UK growth limits sterling’s potential irrespective of slight political shifts. MUFG adopts a more positive outlook, aiming for approximately 1.40 by mid-2026, based on the expectation of a gradual weakening of the dollar as the Fed implements easing measures, despite the ongoing noise in UK politics. Wells Fargo adopts a contrasting approach, indicating approximately 1.34 as we approach year-end, based on the perspective that US assets will regain capital flows as global rate cuts are anticipated to be slower and more constrained than market expectations suggest. The assembled projections establish a range between 1.34 and 1.40. The level near the mid-1.36 area is positioned nearly perfectly within that range, reinforcing the indications presented by the chart. GBP/USD is no longer exhibiting a clear trend. The market is responding to political and central-bank news within a broad sideways channel, experiencing volatility spikes whenever there are changes in leadership prospects or monetary policy committee guidance.