Pound Hits Two-Month Low Versus Euro as UK Politics Spurs Hedges

The pound fell to its lowest level against the euro in more than two months and traders paid for protection against further losses after a special in Manchester signaled trouble ahead for the governing Labour Party.

Sterling was around 87.60 pence per euro on Friday, the weakest since Dec. 19. The pound is heading for a fourth straight weekly decline and its worst month since June versus the common currency. It’s also the worst Group-of-10 performer this month against the dollar.

Political risks are stacking up. The Green Party candidate romped to victory in Gorton and Denton on Thursday, underscoring the threat to Prime Minister Keir Starmer from his left flank. Chancellor of the Exchequer Rachel Reeves is due to present the government’s spring economic statement next week.

In markets, attention is increasingly shifting to politics as a large share of options traded this month expires in the days after the May 7 local elections.

“There’s no shortage of political flashpoints over coming weeks – from the fallout of this week’s by-election, to challenging local elections,” wrote ING analysts including developed market economist James Smith .

Options pricing shows the path of least resistance for sterling is lower. Risk reversals, a gauge of whether investors are paying more for protection against sterling weakness than for upside, have moved further toward the pound’s downside this month.

Starmer swept to power in a landslide victory in 2024. While the next election does not have to take place until 2029, the Labour Party has consistently lagged right-wing party Reform UK in the polls and Starmer could face a leadership challenge from rivals within his Labour Party. The risk for investors is that Starmer is replaced by a leader who is not as committed to sticking to the fiscal rules laid out by the government.

Data from the Depository Trust & Clearing Corporation show roughly two-thirds of euro-pound trades this month were positioned for fresh cycle highs.

The most active strike sat near 0.88, close to spot levels, but there was also meaningful interest in higher strikes such as 0.90 and 0.92, including expiries as early as July, keeping open the possibility of a larger move beyond the immediate political calendar.

“The FX moves are modest but do suggest some notice is being taken of the result where the implication is that there will be further pressure on Starmer to tack leftwards to meet the Green’s electoral advance,” said Sam Hill , head of market insights at Lloyds Bank Plc.