Above: P.M. Keir Starmer defends his budget in a speech delivered Monday. Picture by Simon Dawson / No 10 Downing Street.
Pound sterling has largely shaken any risk premium associated with domestic political uncertainty, for now at least, says new research.
ING Bank says Thursday the pound appears to have largely priced out political risk over the past 10 days.
"We estimate that the EUR/GBP political risk premium (short-term overvaluation) peaked at around 1% on 15 May and has since been unwound back to zero," says a daily briefing from ING strategist Franceso Pesole.
ING had previously warned that the prospect of a change in both prime minister and chancellor remains one of the key threats to sterling this year.
The latest call from the bank comes as the pound to euro exchange rate eases to 1.1550, settling back towards the middle of a long-standing range that has been in place for most of 2026 and 2025.
The pound fell mid-month when Andy Burnham, Mayor of Manchester, said he would stand for election to the UK Parliament as the first necessary step to replace Keir Starmer as Prime Minister.
The decision opened the door to months of political uncertainty and worries that the UK would be in line to receive a new leader who is more committed to left-wing policies.
Pound sterling recovered after Burnham explicitly committed to following the UK fiscal rules, easing fears he would increase borrowing. Pound-euro rose to the cusp of 1.16 in the days that followed, where it encountered a significant technical resistance barrier.
"Burnham, the Mayor of Greater Manchester and the candidate seen as the frontrunner by betting markets (and likely the market), has recently adopted a more market-friendly fiscal stance, indicating he would not alter the existing fiscal framework or loosen borrowing limits," says Pesole.
The analysis also explains timing is an issue for markets as there's a difficulty in pinning down the timing of any leadership challenge.
"With Prime Minister Keir Starmer pledging to fight on, the most plausible window for a new candidate to emerge would be around September, after a leadership challenge through the summer," says Pesole. "Against a backdrop of heavy external headlines, that risk is not especially easy to price into FX at this stage."
ING says upside risks for the euro against the pound remain, as some political risk could be repriced.
"However, absent a particularly hawkish ECB or a dovish Bank of England, the pair may struggle to trade sustainably above 0.870 in the very near term."
EUR/GBP at 0.8700 gives a GBP/EUR of 1.15.