Sterling weakened after UK Prime Minister Keir Starmer said he would step down as Labour leader and Prime Minister, pushing GBP/JPY lower towards 213.00 on Wednesday. The move injected fresh uncertainty into the UK political outlook, with Labour leadership nominations expected to start on 9 July. GBP/USD also slipped in early European trade, drifting to about 1.3195 as the Pound softened on the instability.
In broader trading, GBP/USD was near 1.3200 in Asian hours as the US Dollar found support from firm US economic data alongside a complicated geopolitical backdrop. Attention then turned to the next key US release, with the May PCE Price Index due on Thursday. FXStreet attributed the session’s tone to caution that favoured the Dollar while keeping Sterling on the defensive.
Political Uncertainty and Volatility in Sterling
The unexpected resignation of the Prime Minister injects significant uncertainty into UK politics. We believe this will drive up implied volatility in Sterling pairs over the coming weeks. Derivative traders should consider strategies that profit from increased price swings, such as buying straddles or strangles on GBP/USD.
We’ve seen this pattern before, particularly during the leadership turmoil of September 2022 when the Cboe Sterling Volatility Index (BPVIX) surged over 50% in a short period. A similar spike is now a distinct possibility as the market digests this shock and awaits the Labour leadership nominations on July 9th. This suggests buying volatility, even at elevated levels, could be a prudent move.
Sterling Downside Risks and US Dollar Strength
Given the political vacuum, our bias for Sterling is to the downside against the US Dollar. We recommend buying GBP/USD put options to profit from further weakness while capping risk. This view is supported by the Bank of England’s difficult position, having only recently seen inflation return to its 2% target after a prolonged battle.
This week’s US Personal Consumption Expenditures data will be a critical catalyst. Recent figures from the Bureau of Economic Analysis showed core PCE has remained sticky, hovering around 2.8% year-over-year. Another strong reading would bolster the US Dollar and could easily push GBP/USD toward the 1.3000 psychological level.
We are also increasingly cautious on the GBP/JPY cross, which is highly sensitive to shifts in global risk sentiment. The political instability in Britain contrasts with the Bank of Japan’s slow but steady path towards policy normalization. This policy divergence makes selling into any rallies in the pair an attractive strategy.
