On February 10, 2026, Starmer will still be at 10 Downing Street, but this does not mean that British politics has returned to stability. The turmoil of the past week is more like a crisis temporarily suppressed by the party system than a genuine resolution of the contradictions. Mandelson's ignominious departure, the successive departures of key aides, and the public separation of the Scottish Labour Party collectively outline the awkward situation of the Labour government: the Prime Minister's position remains, but his authority has been significantly shrunk; government institutions can still barely function, but the efficiency of policy implementation has clearly slowed down. For sensitive financial markets, this state of "weak governance, stable position" is by no means beneficial. The current trend of the pound is no longer a reaction to the risk of a single event, but a continuous pricing of the long-term political discount in Britain.



I. Misjudgment: Governance Cracks That Damage the Market More Than Scandals

The impact of the Mandelson affair on the market stemmed not from the scandal itself, but from the complete erosion of confidence in the Labour government's decision-making and internal control. As a key figure in the Starmer government's efforts to maintain relations with the US, Mandelson's appointment was not a simple technical arrangement, but a well-considered strategic choice by Downing Street. However, declassified documents reveal that internal reviews had clearly highlighted the potential risks before the appointment was even initiated; despite this, Downing Street insisted on proceeding. This decision directly caused an irreparable rift in the Labour Party's long-held advantage of "governance compliance and ethical leadership."

For global long-term funds, the impact of this rift is not "abandoning UK investment," but rather a significant increase in the required margin of safety. The market reaction did not manifest as a large-scale sell-off of the pound or UK assets, but rather as a more subtle and persistent repricing: global funds proactively reduced their allocation to UK assets, shortened investment duration to mitigate uncertainty, and significantly increased demand for pound hedging to avoid potential volatility losses. The marked increase in implied volatility of the pound in early February was the earliest market signal of this silent repricing, indicating that the pound would enter a period of "high volatility and low elasticity," and reflecting a loss of market confidence in the Labour Party's governance.

II. Staff Departure: A Fatal Loss to Policy Predictability

In this political crisis, the impact of Morgan McSweeney's resignation has been severely underestimated, and even ignored by some media outlets. However, for financial markets, the impact of this event is no less significant than that of Mandelson's departure. In the context of modern financial markets, while the content of government policies is important, the consistency of policy information, the transparency of the decision-making process, and the efficiency of internal coordination are even more crucial—and McSweeney has long been the core hub for internal coordination and external communication within Downing Street.

As a key advisor to Starmer, McSweeney was responsible for coordinating policy connections across government departments and communicating with financial markets and institutional investors. His presence essentially provided a "policy anchor" for the market, significantly reducing the cost of interpreting Labour policies and minimizing uncertainty. When this anchor suddenly disappeared, the market did not immediately anticipate a fundamental shift in Labour policy direction, but instead quickly entered a wait-and-see mode: Would Labour maintain its previously promised policy priorities? Could existing policies be successfully implemented? Would internal power struggles within the government delay the decision-making process? These questions directly led to a shift in the market's pricing logic for the pound from "macro data-driven" to "uncertainty discount-driven."

This uncertainty is often first reflected in the highly sensitive foreign exchange market, rather than in lagging macroeconomic data. Compared to the previous rise in implied volatility, the repeated fluctuations of the pound in early February were essentially the market's advance pricing of the declining continuity of the Labour government's policies. It was a rational response to the "increased cost of policy interpretation and decreased efficiency of implementation," and it also indicates that in the future, the pound's exchange rate will be more influenced by political noise than by economic fundamentals.

III. Scottish Cut-off: A Real Warning Sign of the Collapse of Party Unity

Anas Saval, leader of the Scottish Labour Party, publicly distancing himself from the London Labour leadership is not an emotional act of rebellion, but a rational choice made by a local party under real-world political pressure. It is also a clear warning sign that Labour's internal unity is beginning to crumble. With national polls showing a continued decline and Starmer's approval rating plummeting, if the Scottish Labour Party continues to be deeply tied to the London leadership, it will directly bear the electoral costs of this national political downturn—costs that, in the upcoming local election cycle, could determine whether the Scottish Labour Party can retain its current seats and even its survival in Scotland.

Savar's move to divide the party is significant because it signifies a proactive strategy of "diverging political risks" within the Labour Party: local organizations are prioritizing their own electoral security over upholding the central government's authority and party unity. If this trend spreads, it will directly weaken the central government's policy coordination capabilities—especially on key issues requiring close cooperation between the central and local governments, such as energy transition, tax revenue sharing, and public investment, where progress will be significantly hampered. For financial markets, this is not merely a political shift in a single region, but a clear signal: the Labour government's future policy implementation pace will slow considerably, and the effectiveness of policy implementation will be greatly reduced. This expectation of "difficult policy implementation" will further exacerbate long-term pressure on the pound. This potential for party division also sows the seeds of a deeper crisis for Starmer's leadership.

IV. The Unexpected Leadership Struggle: Starmer's "Passive Survival" and the Party's Internal Dilemma

During the most tense days of this political crisis, Starmer did not escape challenges within the party. On the contrary, the internal debate within the Labour Party regarding whether to initiate the leadership transition process was exceptionally intense. This was not mere media hype, but a substantive struggle stemming from multiple real-world pressures. Some MPs worried that declining national poll numbers would directly jeopardize their own re-election prospects and were unwilling to remain tied to Starmer, whose approval ratings were weakening. Others were deeply dissatisfied with Starmer's judgment in the Mandelson affair and questioned his ability to continue leading the Labour Party to maintain its governing dominance. Still others attempted to exert pressure through challenges in exchange for greater influence in policy-making or promotions within the party.

However, these grievances have failed to coalesce into an effective challenge, primarily due to the Labour Party's "20% threshold" rule and the fragmented nature of the opposition. According to Labour Party rules, any formal challenge to the leader must receive public signatures from at least 20% of Labour MPs to initiate the succession process—which, given the current size of Parliament, means approximately 80 Labour MPs would need to publicly declare their separation from Starmer and support the challenge. This threshold, originally designed to prevent frequent infighting and maintain party unity, has, in this crisis, completely blocked any possibility of a challenge, becoming a "political risk firewall."

The core function of this threshold is not simply a "numerical limit," but a risk warning to challengers: any member of parliament attempting to launch a challenge must be certain that they can not only gather 80 signatures but also defeat Starmer in the challenge—otherwise, if the challenge fails, the signatories will be systematically marginalized and will face clear "punishments" in future party committee seat allocations, policy negotiations, and candidate accreditation, paying a heavy political price. For most privately dissatisfied members of parliament, expressing dissatisfaction privately is virtually costless, but publicly signing a petition means "betting their entire political future." Without a clear consensus on succession and without an overwhelming chance of victory, waiting and seeing is undoubtedly the best option.

More importantly, the Labour Party has consistently lacked a "broadly acceptable alternative": potential successors are either too radical in their stance to garner support from centrist voters and moderates within the party, or lack national appeal and governance experience to stabilize market expectations. For financial markets and centrist voters, any sudden change of leadership could trigger greater political uncertainty and even lead to a drastic shift in Labour policy—a concern that exists not only at the market level but also within the Labour Party itself, further hindering the coalition of challenging forces.

Ultimately, Starmer retained his position as party leader not because he regained broad party support or restored his authority, but because he successfully avoided three things: allowing scattered discontent to erupt, enabling potential challengers to form a unified alliance, and allowing the timing for a challenge to ripen. During the crisis, Downing Street sent unusually clear signals: it would not proactively reshuffle the leadership, nor would it make radical concessions on key issues such as energy and taxation. This "wait and see" strategy, while further weakening the Labour government's reform momentum, also temporarily reduced short-term political uncertainty—for most Labour MPs, a "weak but predictable" prime minister was far more controllable and in their political interest than a potentially out-of-control internal party struggle. Starmer's continued tenure was essentially a matter of "institutional support" rather than "victory through ability." His authority had already been severely weakened, and the Labour Party had fully entered a phase of "weak governance and high friction."

V. Institutional Views

Lee Hardman, senior currency analyst at MUFG Financial Group , pointed out that sources within the Labour Party indicate significant resistance to launching a leadership challenge before the May local elections. He analyzed, "This development should help reduce the risk of a more severe sell-off in the pound in the near term." Combined with real-time market performance, the euro traded at 0.8719 pounds sterling, up 0.26%, indirectly reflecting market expectations of a reduced risk of a short-term sell-off in the pound.

Michael Pfister, a currency analyst at Commerzbank , noted, "Despite the Labour Party's strong victory in the 2024 election and its commitment to stability, it remains uncertain whether Starmer will remain prime minister by the end of this year." He added, "The pound is currently under pressure from uncertainty, a situation that could persist until the problem is sustainably resolved." His view echoes previous institutional assessments that the pound will be "long-term suppressed by political uncertainty," further reinforcing expectations of a "high volatility, low trend" for the pound.

A recent report by ING strategists states that investors are likely to continue demanding a risk premium for UK government bonds due to the ongoing political instability in the UK. The report notes that Prime Minister Starmer's rejection of calls for his resignation on Monday provided temporary relief to investors worried about potential leadership changes, and UK government bond yields declined slightly after Starmer's reassuring statement. However, despite this short-term easing, the market is likely to continue demanding higher yields for UK government bonds compared to similar bonds in other developed markets. This indicates that political uncertainty is already being priced into the market, and as long as the fundamental factors of political instability remain, the risk premium for UK government bonds will persist.

On February 9th, a pivotal moment in the escalating Starmer crisis, the Bank of England announced it would maintain its benchmark interest rate at 3.75%, and released an official commentary on its foreign exchange policy that afternoon. The commentary stated that the UK economy was showing signs of stabilization, and the interest rate stability was intended to balance inflation and growth. However, political anxiety stemming from the Starmer government's governing crisis would continue to dominate the pound's short-term movements. The Bank of England anticipates that the pound will remain highly volatile in the coming weeks, with the correlation between exchange rate movements and political news continuing to strengthen. Political uncertainty will remain the core factor influencing the pound's short-term fluctuations.

VI. The Market Costs of Weak Governance: The Pound's Long-Term Predicament

From the perspective of the fundamental logic of financial markets, the most difficult thing to price is not "drastic political changes"—drastic changes are often accompanied by clear market expectation corrections and pricing outcomes—but rather "political structures that are in a state of prolonged semi-paralysis." The current weak governance of the Starmer government is precisely this "most difficult to price" state: policies can be proposed, but are difficult to implement quickly; the direction seems clear, but is constantly diluted by intra-party struggles and local fragmentation; the government appears stable, but its authority continues to erode, and decision-making efficiency continues to decline. This state is also the core source of the "political uncertainty" repeatedly mentioned in previous institutional analyses.

In this political climate, global capital is not opting for a "panic exodus from the UK," but rather a "rational reduction in allocation intensity." After all, the UK remains a major global economy with a mature financial market and a stable institutional foundation, but the risks posed by its political uncertainty are insufficient to sustain previous capital allocation ratios. This "no withdrawal, but reduced allocation" approach explains why the pound has not experienced a precipitous drop recently, but rather exhibits a "structurally weak, volatile" trend: the market lacks the motivation for large-scale selling, but also lacks the confidence to buy, and can only repeatedly adjust pricing within the framework of "uncertainty discount."

Given the current political landscape and market expectations, including Starmer's weak leadership, unresolved divisions within the Labour Party, and a generally bearish outlook from institutions, the pound is likely to maintain a neutral-to-bearish overall trend ahead of the UK local elections in May. If political uncertainty in the UK rises again (such as renewed internal party challenges, new governance failures by Starmer, or a resurgence of calls for Scottish independence), the exchange rate will become significantly more sensitive to negative news. If the political situation eases temporarily (such as a compromise between Starmer and moderates within the party, or a slight increase in poll support), the pound may experience a short-term rebound, but the magnitude of the rebound will be limited, and it will likely return to a weak trend afterward.

Conclusion

Starmer ultimately retained his position at 10 Downing Street, temporarily quelling the turmoil within the Labour Party. However, this "non-existent leadership contest" had already exposed the deep-seated predicament of the Labour government: discontent within the party was real, yet collective action was difficult to achieve; the leadership remained in their positions, but had lost sufficient authority; the government could maintain superficial stability but was unable to advance substantive reforms. The Labour Party had fully entered a phase of high-friction governance, and British politics had fallen into a stalemate of "no turmoil, but no hope."

For the pound, the current political risk premium does not stem from an isolated political crisis, but rather from a political stalemate with no clear way out. As long as the Starmer government's weakness remains unchanged and the divisions within the Labour Party are not resolved, this political risk premium will persist, becoming the core factor suppressing the pound's performance. In the future, the pound's fate will no longer depend solely on the UK's economic fundamentals, but even more so on the evolution of the British political landscape—an unfulfilled leadership contest has already sown the seeds for the pound's long-term predicament.