Pound Slumps After Shock Labour Defeat Rekindles Political Risks

The Pound weakened significantly following the results of the by-elections in Gorton and Denton on Thursday (February 27). GBP/USD plunged below the 1.3500 area, while EUR/GBP surged past the 0.8760 level as markets reacted to the unexpected shift in the political landscape.

The shock stemmed from a decisive defeat for the Labour Party. The Green Party secured victory, with Reform UK finishing second, while Labour placed third—an outcome that diverged markedly from market expectations. Labour had long been regarded as dominant in both constituencies, making the result particularly unsettling for investors.

The setback immediately fueled speculation over the leadership prospects of Prime Minister Keir Starmer. Several media outlets highlighted the possibility of mounting internal pressure within the Labour Party for Starmer to step aside in favor of a figure perceived as more capable of restoring public support.

For the financial markets, the potential change in leadership represents a significant political risk. If a new prime minister emerges, the direction of UK fiscal policy could become more expansive in pursuit of popularity, potentially worsening the national debt situation. This concern is what is pressuring the pound's value.

Dominic Bunning, a foreign exchange strategist at Nomura, views the Labour Party's defeat in its traditional voter base as a negative signal for the British currency. He believes that this situation increases the chances of a leadership change towards a less market-friendly direction, a risk that has not been fully accounted for in GBP movements.

A similar view was expressed by Barclays. The bank assesses that the current prime minister's position is becoming increasingly fragile. While it is still uncertain whether Starmer will be ousted, the significant defeat in the by-elections is considered not to be taken lightly. Barclays also highlighted the strengthening influence of the moderate left wing in the Labour Party, which they believe could justify a higher fiscal risk premium on the Pound Sterling.

In addition to political factors, pressure on the Pound is exacerbated by disappointing economic data. Research group GfK reported an unexpected decline in the UK consumer confidence index for February 2026, reflecting rising unemployment and adding to the currency's near-term vulnerability.