Sterling extends losses as UK cabinet crisis fuels fiscal concerns

The British Pound weakened against the US Dollar for the fourth consecutive session on Thursday, as political uncertainty in the UK intensified and investors shifted towards the stronger US currency.

Sterling was trading at 1.3337 against the Dollar at the time of writing, pressured by growing concerns surrounding instability within the UK government and fears of a potential fiscal crisis.

UK political tensions weigh on Pound

Pressure on the Pound increased after the resignation of Health Secretary Wes Streeting on Thursday, adding to concerns over the stability of Prime Minister Keir Starmer’s government.

The resignation has further isolated Starmer, who is already facing mounting criticism within the Labour Party following poor results in last week’s local elections.

Several Labour lawmakers have reportedly begun efforts to replace Starmer, increasing speculation about a possible leadership challenge and creating uncertainty over the future direction of the government.

The internal power struggle within Labour has raised fears of a disorderly transition of leadership.

Investors are also concerned that a potential successor could adopt looser fiscal policies, reviving worries about fiscal instability in the UK.

These concerns have weighed heavily on market sentiment towards the Pound, extending the currency’s recent losses against the Dollar.

Strong US data supports the Dollar

While the Pound remained under pressure, the US Dollar continued to strengthen as investors reacted to resilient US economic data and rising inflation concerns.

Retail Sales data and weekly Initial Jobless Claims figures released on Thursday pointed to continued strength in the US economy.

The data reinforced expectations that the Federal Reserve may need to raise interest rates again either later this year or at the beginning of 2027.

Expectations of higher interest rates have supported demand for the Dollar, as traders anticipate tighter monetary policy from the US central bank.

Surging inflationary pressures have also contributed to the stronger Dollar outlook, with markets increasingly pricing in the possibility of further policy tightening from the Federal Reserve.

The divergence between political uncertainty in the UK and economic resilience in the US has widened the pressure on Sterling in recent sessions.

Market focus shifts to Trump-Xi summit

The UK economic calendar remains relatively light on Friday, leaving investors focused primarily on geopolitical developments and upcoming trade discussions between the United States and China.

Market attention is centred on the summit between US President Donald Trump and Chinese President Xi Jinping.

Investor sentiment around the talks has remained cautiously optimistic so far, with comments from both sides viewed positively by markets.

However, traders are waiting for concrete announcements regarding trade agreements or specific measures linked to reopening the Strait of Hormuz.

Any developments from the summit could influence broader market sentiment and impact demand for safe-haven assets, including the US Dollar.

For now, the Pound remains under pressure as political uncertainty in the UK continues to dominate investor sentiment while stronger US economic data keeps the Dollar supported.