* Pound was Europe’s best performer in March
* Money is facing political and economic risks
* Political uncertainty often leads to market jitters
LONDON, April 30 (Reuters) – The pound’s latest slide against other major currencies comes amid the Iran war, as a combination of political, economic and inflationary risks erupts in UK markets.
Sterling emerged as Europe’s top performer in March, and strengthened by around 2.1% against the US dollar and around 0.8% against the euro in April.
But the scandal surrounding Prime Minister Keir Starmer’s appointment of Peter Mandelson, who was linked to convicted sex offender Jeffrey Epstein in the United States, as ambassador to the United States, does not appear to be abating.
At the same time, the British economy is struggling, not least because of the conflict in the Middle East which has pushed up electricity prices. Although wartime economic data is still limited, inflation in Britain rose to 3.3% in March, and higher rates are expected to weigh on growth.
And polls suggest Starmer’s Labor Party could face a challenge when most local authorities hold elections on May 7.
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The options market shows traders are very nervous about election week. Two-week implied volatility, a measure of the need to hedge against the pound’s greater volatility, is around 6.5%, according to LSEG data, compared with 6.1% for one-week implied volatility and 6.4% for one-month implied volume.
“I think there is definitely an event risk with the election, and this always invites political instability or financial risks. And I think in our estimates and forecasts, that means a slight softening of the pound in May,” said Barclays currency strategist Lefteris Farmakis.
Another market concern is the strength of Starmer’s leadership.
“I think if we see a leadership challenge, I think the market will at least see that as a reason to sell the pound,” said Lee Hardman, chief financial analyst at MUFG.
LEFT-SIDED MARKETS
While Starmer’s position was called into question in early February as the Mandelson scandal deepened, weekly data from the US market regulator showed speculators were adding to short positions – those based on devaluation – in the pound.
Starmer fired her in September after emails revealed the depth of Mandelson’s relationship with Epstein. British police arrested Mandelson in February on suspicion of misconduct in public office. He has been released on bail and has not been charged. He has not commented publicly on the allegations. He is facing allegations of sexual misconduct.
Observers had held positions on the pound for the first 18 months of Starmer’s term, but that conviction began to erode towards the end of 2025.
The question of succession in particular plays an important role, markets are afraid of left-leaning people. Concerns about looser monetary policy could for example cause market jitters due to the UK’s already tight public finances.
Markets worry that higher borrowing could lead to further increases in public debt, and have been more sensitive to changes in monetary policy since the “minimum budget” crisis of 2022, which saw major market turmoil.
“Is it going to be someone from the left wing of the Labor Party? And that’s something that neither the money markets in the UK, nor the bond markets, nor sterling, is very receptive to,” said Sandra Horsfield, an economist at Investec.
Traders at prediction site Polymarket last pegged a 17% chance of Starmer stepping down in May, down from 38% on April 17 and down from 34% last week.
Starmer has said he will lead the party into the next election, which is due to take place in mid-2029.
DANGERS OF FRONT WARS
One of the biggest trends for the pound has been the rapid repricing of interest rate expectations. The Bank of England was expected to offer at least one more cut this year to combat a flat-line economy, but that has come down to expectations for a double hike.
The shift in expectations and the sharp rise in British government bond yields have served as a catalyst for extraordinary strength, despite the energy shock from the war.
However, as the conflict has come to a head, harvests have fallen back – and they are taking their support from the pound, said MUFG’s Hardman, noting that there could be further war-related falls.
“We would have expected to eventually see another negative impact, not just on the UK economy, but on the pound and from these higher energy prices having a negative impact on the economy, on growth, on inflation, and on the pound itself,” he said.
Forex Government and Politics
