The Pound’s recent surge against other major currencies during the Iran war is starting to fade as growing political, economic, and inflation concerns weigh on UK markets.
Sterling had been an unexpected top performer in Europe in March, rising about 2.1% against the US Dollar and around 0.8% versus the Euro in April.
However, controversy surrounding Prime Minister Keir Starmer’s appointment of Peter Mandelson, who has been linked to the late convicted US sex offender Jeffrey Epstein, as ambassador to the United States shows no sign of easing.
At the same time, the UK economy is under strain, partly due to the Middle East conflict pushing energy prices higher. Although wartime economic data remains limited, inflation climbed to 3.3% in March, and rising costs are expected to drag on growth.
Meanwhile, polls indicate that the Labour Party could suffer significant losses as several local authorities head into elections on 7th May, Reuters reports.
The options market suggests growing unease among traders ahead of election week. Two-week implied volatility, a gauge of demand for protection against sharp moves in the Pound, stands at about 6.5%, according to London Stock Exchange Group data, compared with 6.1% for one-week implied volatility and 6.4% for one-month implied volatility.
One concern in the market is how secure PM Keir Starmer’s leadership remains.
As questions over his position grew in early February, amid escalating controversy around Peter Mandelson, weekly figures from US Commodity Futures Trading Commission show that speculators increased their short positions in the Pound, betting on a decline in its value.
Speculators had remained optimistic about the Pound for most of the first 18 months of Keir Starmer’s tenure, but that confidence started to erode toward the end of 2025.
Uncertainty over leadership succession has become a major factor, with markets wary of a potential shift toward more left-leaning figures. Fears that this could lead to looser fiscal policy are adding to volatility concerns, especially given the UK’s already fragile public finances.
Investors are concerned that increased borrowing could fuel another sharp rise in public debt, and they have remained highly reactive to changes in fiscal policy since the 2022 mini-budget episode, which triggered severe turmoil in the UK gilt market.
On the prediction platform Polymarket, traders were most recently pricing a 17% probability that Keir Starmer could step down in May, down from a peak of 38% on 17th April and 34% just a week earlier.
Starmer has reiterated that he plans to remain in office and lead his party into the next general election, expected by mid-2029.
Furthermore, one of the key supports for the Pound has been a sharp shift in expectations around interest rates. The Bank of England was previously expected to cut rates at least once this year to help a stagnating economy, but market pricing has now swung in the opposite direction, with traders instead anticipating two rate increases.