GBP: Currency Strength is Latest Sign That Leftward Shift is Well-Priced

With the removal of his key aide McSweeney and now his director of communications Allan (both were directly appointed by the PM), Starmer's team in Number 10 is dwindling fast and raising questions on his longevity in office. So why is GBPUSD near 150 pips off lows and EURGBP fading?

• In short - the political machinations of the past few weeks are becoming much more well-priced. These aide roles will have to be filled, and Starmer may look to reassure the Parliamentary Labour Party by appointing advisors that reflect the more left-wing views of the party. While this is unlikely to reverse the tide of his premiership (Polymarket odds are against Starmer retaining office beyond the end of June), it means the fiscal and political approach of the UK is likely to shift to the left in the second half of this parliament, regardless of who leads the party.
• Starmer has stressed he is not planning to resign at this stage - and he is also unlikely to face any leadership challenge before May. Labour are expected to perform particularly poorly at the local / Scottish / Welsh elections, after which a leadership challenge or resignation becomes much more likely. MPs Wes Streeting and Angela Rayner are seen as likely challengers (see our thoughts on policy under Rayner here: https://www.mnimarkets.com/articles/possible-fiscal-policy-under-rayner-and-why-the-market-cares-1770287351403 )
• This timeline of risks can be observed via GBP vols. GBP vol risk emerges beyond the very front-end of the curve, with the ratio between GBP implied/realised vols north of the G10 average for the two-week to two-month sector of the curve, but only marginally, before a far more notable risk premium for one-year onwards - likely capturing a spell of renewed UK policy and fiscal uncertainty and cementing the market view that GBP will remain structurally volatile beyond the near-term - see chart here: