Starmer's life hangs by a thread! The Epstein scandal triggers a wave of resignations, and the pound experiences a rollercoaster ride.
2026-02-10 11:41:49
The pound and government bonds were under pressure for most of Monday as a series of resignations linked to the Epstein scandal threatened Starmer’s control of power.
But by the afternoon, Downing Street's counterattack was underway, which seemed to calm the financial markets and help the pound regain stability.
The euro fell from a three-week high of 0.8740 to around 0.8700 against the pound, despite public support from Starmer's cabinet members and even potential successors. Analysts are paying particular attention to the pound-euro exchange rate as a gauge of pressure, judging it as the purest expression of the UK-specific risks in the current market landscape.
Jeremy Stretch, chief international strategist at CIBC Capital Markets, said: “We would prefer to look for a top in the euro against the pound and/or poor performance of UK gilts against German gilts to address potential political risks. On the fixed income dynamics, we note that any potential leadership change could lead to a more accommodative fiscal stance.”
The pound came under particular pressure after Labour's Scottish leader, Anwas Sanwar, publicly called for the prime minister's resignation. The risk is that this move opens the floodgates for further calls. Recent history suggests that once cabinet members begin to resign, the game is effectively over.
Angela Rayner, touted as a potential successor, has also publicly expressed her support. UK government bond yields have retreated from earlier highs, suggesting the market believes the Prime Minister is out of danger.
A Goldman Sachs report stated, "We do have a moment of clarity ahead of the by-election, but it still doesn't seem like there's an alternative leader who can quickly unite lawmakers."
The analysis also points out that leaders can persevere, such as Theresa May. Moreover, "no British leader is really pushing for spending without funding, and a worse situation could be the weakening of fiscal rules."
Citigroup also adopted a cautious approach, stating in its daily updated report: "UK government bonds are underperforming in terms of the UK political risk premium, and we will proceed with caution." After all, Starmer holds a majority of seats, and no MP has directly called for his resignation.
Citigroup stated, "Starmer will meet with lawmakers after the market closes, and in the meantime, we will monitor for cabinet resignations. Our feeling is that a leadership change is increasingly inevitable, but the tipping point may not be here." The game truly begins once we see lawmakers' names on the list.
The political crisis that began last week, triggered by the Prime Minister's appointment of Peter Mandelson, escalated this morning: Starmer's communications director, Tim Allan, resigned Monday morning to prepare to assemble a "new team"; Morgan McSweeney resigned as chief of staff at 10 Downing Street on Sunday because of his role in the decision to appoint Peter Mandelson as U.S. ambassador. The Epstein Papers, released last week, revealed a very close relationship between Mandelson and the notorious financier who was accused of child molestation, including leaking sensitive government information.
These resignations have sparked intense speculation about the prime minister's future, similar to the events that led to the resignations of Theresa May, Boris Johnson, and Liz Truss. Market concerns include the possibility that, in the event of Starmer's resignation, someone leaning towards the Labour left will be chosen to succeed him.
Any commitment to market-friendly reforms and fiscal discipline is likely to leave 10 Downing Street in Starmer's suitcase. For the pound and UK government bonds, the moment is fraught with risk.
Political commentators say Starmer will not fully recover from the blow to his authority, and it is only a matter of time before he draws his sword. This should ensure that the pound maintains a risk-related premium in the coming months.
EUR/GBP 1-hour chart. Source: FX678
At 11:39 AM Beijing time on February 10, the euro was trading at 0.8701/02 against the pound.
But by the afternoon, Downing Street's counterattack was underway, which seemed to calm the financial markets and help the pound regain stability.
The euro fell from a three-week high of 0.8740 to around 0.8700 against the pound, despite public support from Starmer's cabinet members and even potential successors. Analysts are paying particular attention to the pound-euro exchange rate as a gauge of pressure, judging it as the purest expression of the UK-specific risks in the current market landscape.
Jeremy Stretch, chief international strategist at CIBC Capital Markets, said: “We would prefer to look for a top in the euro against the pound and/or poor performance of UK gilts against German gilts to address potential political risks. On the fixed income dynamics, we note that any potential leadership change could lead to a more accommodative fiscal stance.”
The pound came under particular pressure after Labour's Scottish leader, Anwas Sanwar, publicly called for the prime minister's resignation. The risk is that this move opens the floodgates for further calls. Recent history suggests that once cabinet members begin to resign, the game is effectively over.
Angela Rayner, touted as a potential successor, has also publicly expressed her support. UK government bond yields have retreated from earlier highs, suggesting the market believes the Prime Minister is out of danger.
A Goldman Sachs report stated, "We do have a moment of clarity ahead of the by-election, but it still doesn't seem like there's an alternative leader who can quickly unite lawmakers."
The analysis also points out that leaders can persevere, such as Theresa May. Moreover, "no British leader is really pushing for spending without funding, and a worse situation could be the weakening of fiscal rules."
Citigroup also adopted a cautious approach, stating in its daily updated report: "UK government bonds are underperforming in terms of the UK political risk premium, and we will proceed with caution." After all, Starmer holds a majority of seats, and no MP has directly called for his resignation.
Citigroup stated, "Starmer will meet with lawmakers after the market closes, and in the meantime, we will monitor for cabinet resignations. Our feeling is that a leadership change is increasingly inevitable, but the tipping point may not be here." The game truly begins once we see lawmakers' names on the list.
The political crisis that began last week, triggered by the Prime Minister's appointment of Peter Mandelson, escalated this morning: Starmer's communications director, Tim Allan, resigned Monday morning to prepare to assemble a "new team"; Morgan McSweeney resigned as chief of staff at 10 Downing Street on Sunday because of his role in the decision to appoint Peter Mandelson as U.S. ambassador. The Epstein Papers, released last week, revealed a very close relationship between Mandelson and the notorious financier who was accused of child molestation, including leaking sensitive government information.
These resignations have sparked intense speculation about the prime minister's future, similar to the events that led to the resignations of Theresa May, Boris Johnson, and Liz Truss. Market concerns include the possibility that, in the event of Starmer's resignation, someone leaning towards the Labour left will be chosen to succeed him.
Any commitment to market-friendly reforms and fiscal discipline is likely to leave 10 Downing Street in Starmer's suitcase. For the pound and UK government bonds, the moment is fraught with risk.
Political commentators say Starmer will not fully recover from the blow to his authority, and it is only a matter of time before he draws his sword. This should ensure that the pound maintains a risk-related premium in the coming months.
EUR/GBP 1-hour chart. Source: FX678
At 11:39 AM Beijing time on February 10, the euro was trading at 0.8701/02 against the pound.
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