British Pound weakens as UK political turmoil and stronger US Dollar weigh

• GBP/USD extends losses for a third straight day as UK political turmoil and a firmer US Dollar pressure the Pound.
• UK gilt yields surge to multi-decade highs amid fears of fiscal instability and Labour leadership uncertainty.
• The US Dollar Index (DXY) climbs to a more than one-week high amid geopolitical uncertainty and hawkish Federal Reserve expectations.

GBP/USD trades under pressure on Thursday, weighed down by a stronger US Dollar (USD) and rising political uncertainty in the United Kingdom. At the time of writing, the pair is trading around 1.3482, down nearly 0.30% and remaining on the back foot for a third consecutive day.

Speculation surrounding potential leadership challenges to UK Prime Minister Keir Starmer has intensified following Labour’s weak performance in recent local elections. UK Health Secretary Wes Streeting, who is widely viewed as a leading contender to replace Starmer, resigned from the government on Thursday.

Starmer continues to resist mounting pressure to step down, stressing that “we can’t let a leadership contest plunge us into chaos,” while also telling ministers that his government remains a “10-year project.”

Meanwhile, UK bond markets remain under pressure as investors reassess the country’s fiscal outlook. Long-dated gilt yields surged to multi-decade highs earlier this week amid fears that a potential leadership battle within Labour could weaken fiscal discipline and increase government borrowing. The 30-year gilt yield briefly hit around 5.8%, its highest level since 1998, while the 10-year yield climbed above 5.1%, the highest since 2008.

However, yields are pulling back on Thursday as investors view Wes Streeting as one of the more fiscally market-friendly figures within the Labour Party.

Against this backdrop, GBP/USD is expected to maintain a near-term downside bias, with stalled US-Iran talks adding to geopolitical uncertainty and supporting demand for the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.73, its highest level in more than a week.

At the same time, ongoing disruptions in the Middle East and the resulting rise in Oil prices continue to fuel global inflation concerns, adding pressure on central banks to keep interest rates elevated. In the UK, traders are pricing in at least two Bank of England (BoE) rate hikes by the end of the year. However, growing political uncertainty could complicate the BoE’s policy outlook.

The latest US inflation data highlighted the impact of higher energy costs on consumer prices, reinforcing expectations that the Federal Reserve (Fed) may need to maintain a restrictive policy stance for longer. As a result, traders are increasingly pricing in the possibility of a Fed rate hike by the end of the year, providing further support to the US Dollar.

On the data front, US Retail Sales rose 0.5% MoM in April, matching market expectations but slowing sharply from March’s 1.6% increase. The Retail Sales Control Group, which feeds directly into Gross Domestic Product (GDP) calculations, also increased 0.5% in April after rising 0.8% previously.