Britain: a new crisis, old problems

GBP/USD

Key zone: 1.3150 - 1.3250

Buy: 1.3280 (on strong positive fundamentals) ; target 1.3450-1.35; StopLoss 1.3200

Sell: 1.3100 (on a decisive break above 1.3150) ; target 1.2950-1.2900; StopLoss 1.3180

The United Kingdom is once again entering a period of political uncertainty. Keir Starmer’s team has already begun the process of transferring powers to his likely successor, Andy Burnham, while financial markets are being forced to price in not only macroeconomic and geopolitical risks, but also a possible change in the country’s economic course. Against this backdrop, volatility in British assets is rising noticeably.

Reminder:

The political crisis began to unfold after the May local elections, which became a serious blow for Labour. The party lost more than 1,200 local council seats and lost control of dozens of municipal councils.

The problem proved systemic: the Labour Party simultaneously lost support from both political flanks. Some voters shifted to the right, supporting Reform UK, while others moved to the Greens. This redistribution of the electorate triggered a deep internal party crisis and launched open processes aimed at removing Starmer from the post of Prime Minister.

At the same time, the country’s foreign policy course will remain virtually unchanged. The United Kingdom will continue to follow a line of containing Russia and maintaining the closest possible cooperation with Europe under the post-Brexit reality.

However, external factors did not create the crisis; they merely made it significantly more expensive.

• At its June 18 meeting, the BOE directly indicated that the energy shock linked to instability in the Middle East continues to maintain a high level of uncertainty. Despite inflation falling to 2.8%, the regulator warned of the risk of renewed acceleration in the second half of the year due to the pass-through of higher energy prices into the economy.
• At the same time, the Bank of England is recording signs of slowing economic activity and weakening labor market conditions. For the government, this combination of factors is one of the most unfavorable scenarios: the room for both fiscal stimulus and domestic political compromise becomes significantly narrower.

Why is the market afraid of Andy Burnham?

Information that Greater Manchester Mayor Andy Burnham could become the new head of government appeared back in spring. At that time, the pound reacted negatively to these reports.

For investors, Burnham is associated with more active state intervention in the economy. He is traditionally linked with support for expanding budget spending, primarily in the social sphere and the healthcare system, as well as with a less strict approach to maintaining fiscal discipline.

The market views this scenario as a risk factor in several areas at once:

• an increase in the budget deficit;
• growth in government debt issuance;
• increased pressure on the yield of British government bonds, or gilts;
• higher future costs of servicing debt obligations.

The official macroeconomic picture already looks quite fragile. Current forecasts and statistics only reinforce investor caution:

• in March 2026, the OBR forecast real UK GDP growth of only 1.1% in 2026;
• average inflation, measured by CPI, is expected at 2.3%;
• the unemployment peak could reach 5.3%;
• in June, the ONS recorded unemployment at 4.9%, a decline in the number of officially employed workers, and further weakening of the labor market;
• on June 18, the Bank of England kept the rate at 3.75%, while also emphasizing persistent uncertainty caused by the energy crisis in the Middle East.

Against this backdrop, political instability begins to operate through the mechanism of a higher risk premium.

Investors may postpone new investments, the pound comes under additional pressure, gilt yields rise, and the cost of servicing government debt increases.

What does this mean for traders?

The political crisis in the United Kingdom is becoming an independent market risk factor.

For foreign exchange market participants, the conclusion remains fairly pragmatic: the pound is gradually becoming one of the currencies most sensitive to political news.

The most rational tactics now appear to be:

• short-term event-driven trades after official statements by the authorities;
• reducing trade position sizes;
• tighter risk control;
• a cautious attitude toward long-term bets on GBP strengthening.

For now, a moderately bearish scenario for GBP against EUR remains in place if the political crisis drags on.

In GBP/USD, dynamics will depend more on the Fed’s actions and the general behavior of the dollar in the global market, which could smooth out domestic British risks.

In addition to solving economic problems, the new Prime Minister will have to address one more difficult political issue — attempting to reset relations with the U.S. administration and with Trump personally. However, at this stage, the chances of such a miracle are extremely low.

So we act wisely and avoid unnecessary risks.

Profits to y’all!