Pound Plunges Under Pressure from Political Crisis in Britain

On Tuesday, the British pound continued its decline. The reason was growing political pressure on Prime Minister Keir Starmer, which only intensified the negative risk premium for the national currency. In parallel, global markets paused in anticipation of the release of US inflation data, which promises to be a key driver of volatility.

By mid-session, the GBP/USD pair was trading 0.71% lower, hovering around the 1.3514 mark. The EUR/USD pair, meanwhile, declined more modestly — by 0.37%, to 1.1738.

Pressure on the Prime Minister Reaches a Critical Point

The political situation in the UK deteriorated sharply after Home Secretary Shabana Mahmood joined more than 70 parliamentarians who publicly called on the sitting prime minister to resign. According to betting market odds, there is now a high probability that Starmer will leave his post as early as this year.

Analysts at one major bank note that investors are likely to interpret any imminent public address by the prime minister as a potential resignation statement. They emphasize that a political risk premium is clearly visible in the EUR/GBP pair for the first time in a long while.

According to their estimates, this premium is currently modest (about 0.3% of short-term mispricing), suggesting significant potential for the negative trend to deepen if political uncertainty escalates.

Who Could Replace Starmer

Andy Burnham, Wes Streeting, and Angela Rayner are named as the main potential successors to Starmer. Markets are particularly sensitive to Burnham’s fiscal and economic views.

US Inflation Will Be the Main Trigger for the Dollar

Meanwhile, the main event capable of impacting the dynamics of the dollar and the entire currency market during the current session will be the release of April data on US consumer inflation. Analysts’ forecasts suggest a second consecutive monthly rise of 0.9% in the headline figure. In that case, the annual rate could jump to 4%, notably higher than the market consensus expecting a rise of 0.6% month-on-month and 3.7% year-on-year. Fuel prices — gasoline and diesel — are cited as the key driver of this increase.

Core inflation, meanwhile, is expected to show more modest growth — about 0.3% for the month, aligning with the consensus forecast of 2.7% year-on-year.

Why Strong Inflation Does Not Guarantee a Stronger Dollar

Experts warn that a strong rise in the headline inflation figure alone may not be sufficient for a confident appreciation of the dollar. The key question today lies elsewhere: can such high inflation data, combined with the ongoing stalemate in US-Iran negotiations, finally shake the remarkably resilient stock markets?

In recent weeks, a clear pattern has emerged: good days for the dollar coincide with bad days for equities. Thus, the impact of the CPI report on the US dollar index (DXY) will be channeled through this “equities channel,” rather than solely through the interest rate differential.

Geopolitics Remains in Focus for Traders

The geopolitical agenda remains in the spotlight. It is reported that the current ceasefire regime is “on its last legs,” and emerging reports of renewed military activity near the Strait of Hormuz are keeping oil prices elevated. The longer the current stalemate in relations between Washington and Tehran persists, the higher the medium-term potential for dollar appreciation due to prolonged pressure on the global economy.

EUR/USD Forecast: Holding Above 1.1800 Looks Unlikely

Regarding the EUR/USD pair, analysts maintain a cautiously bearish view. They note that the single currency is holding up solely due to sustained risk appetite in the markets. However, any significant reversal or correction in equity markets would be incompatible with current euro levels.

The release of the ZEW economic sentiment indices for the Eurozone is also expected today. Forecasts point to a further deterioration in German sentiment. Consolidation of the pair above the 1.1800 mark looks unstable under current macroeconomic and political realities. Retesting the 1.1700 level remains the most likely short-term scenario.