Pound steadies as UK politics and inflation cloud outlook

The British pound rose on Monday but remained close to its lowest level since early April, as investors weighed growing inflation concerns linked to rising energy prices against deepening political uncertainty in the UK.

Sterling climbed 0.4% to $1.337 during the session after earlier falling as much as 0.15% to $1.3304, its weakest level since April 8.

The currency remained under pressure as investors reacted to both rising borrowing costs and uncertainty surrounding Prime Minister Keir Starmer.

Political uncertainty unsettles investors

Pressure on Starmer intensified following poor results for the Labour Party in local elections held earlier in May.

The losses triggered calls from nearly a quarter of Labour lawmakers for the prime minister to step down.

At the same time, two political rivals are openly seeking to replace him, adding to investor concerns about the future direction of government policy and fiscal management.

During a visit to the Labour Party headquarters, Starmer addressed speculation over his position.

“I am focused on the job that I was asked to do, which is to serve my country and to carry out my duties as prime minister of this country,” he told staff.

The political turmoil has also affected Britain’s bond market.

UK gilt yields surged to multi-year highs last week as investors worried that a possible left-leaning successor to Starmer could support higher government borrowing in an attempt to stimulate economic growth.

Those concerns have added to fears surrounding the country’s already fragile fiscal position.

Inflation concerns add further pressure

Investors are also grappling with the risk of higher inflation due to rising energy prices.

Britain’s reliance on imported energy has amplified worries that the current energy shock could lead to sharper price increases across the economy.

While higher bond yields often attract foreign investors searching for stronger returns, market participants appeared reluctant to hold sterling because of weak economic growth prospects and mounting inflation risks.

The strategists added that they currently preferred selling the pound in favour of the lower-yielding Swiss franc in the near term.

Rate expectations shift sharply

Money markets have also rapidly adjusted expectations for the Bank of England.

Traders now expect the central bank to raise interest rates at least twice this year.

That marks a significant shift from previous market expectations, which had pointed toward around two rate cuts before the Iran conflict escalated in late February.

The changing outlook reflects investor concerns that rising energy costs and persistent inflation pressures could force policymakers to maintain tighter monetary conditions for longer than previously anticipated.

Despite Monday’s modest rebound, sterling remained vulnerable as political instability, elevated gilt yields, and inflation risks continued to weigh heavily on investor sentiment toward UK assets.