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A reported leadership rift at the heart of the UK government has left
the pound holding its ground for now, but investors are starting to
question how long that calm can last, warns the CEO of one of the
world’s largest independent financial advisory organizations.
Health Secretary Wes Streeting has denied claims that he is
positioning himself to replace Prime Minister Keir Starmer, but the
speculation has reignited talk of internal tension at a politically
delicate moment. It comes ahead of a critical Budget on 26 November,
with unease growing over potential tax rises to fill a £30
billion fiscal gap.
Nigel Green of deVere Group says: “Markets are watching
Westminster closely.
“Government leadership rumors surfacing before a crucial Budget
reinforce the sense that the government is under strain.
“Investors aren’t yet pricing in political instability,
but they’re alert to the risk that this story could return in
the new year.”
He continues: “We believe there’s unlikely to be an
immediate leadership challenge after the Budget — the priority
will be getting through it cleanly, but this will be extremely tough
after it looks like income tax rises are now almost inevitable.
“The greater risk in terms of a leadership threat comes in May,
after the local elections.
If Labour performs badly, the internal pressure will intensify, and at
that point we would expect a full-on leadership contest.”
Nigel Green adds that the issue extends beyond Starmer personally.
“Prime Minister Starmer and [Finance Minister] Reeves are
politically intertwined. Investors see them as one fiscal partnership,
the team that restored a sense of economic discipline after years of
turbulence. If one of them goes, both could fall, we believe. This
scenario would unsettle markets instantly.”
Sterling trades around $1.315 against the dollar, slightly firmer
against the euro, with gilt yields stable. “The pound is
resilient for now,” says Nigel Green, “but this calm
depends on confidence that the government will deliver a credible
Budget and remain politically unified afterwards in the run up to next
year’s local election.
“If investors begin to get a whiff of a leadership shift in the
middle of next year, that stability will fade.”
He notes that global investors have a short fuse for renewed
uncertainty.
“Bond traders, in particular, remember the 2022 gilt turmoil
vividly,” he says. “Any sign that the government’s
fiscal direction could change would push yields higher as markets
demand a premium for political risk.
“The pound would soften as international investors move capital
elsewhere.”
The months ahead will test whether the government can preserve
stability while pursuing fiscal restraint.
“The Budget will be about numbers, but the market focus is
credibility and continuity,” he says.
“They will not tolerate leadership upheaval.”
He continues: “If the Budget lands badly, and the party’s
polling deteriorates through spring, the leadership story will gather
momentum.
“That’s when you start to see the political risk premium
widen — first in gilts, then in sterling. It can happen very
quickly once confidence in leadership continuity is gone.”
Nigel Green concludes: “The pound’s steadiness today could
be temporary — it reflects hope that leadership rumours will
stay quiet.
“Investors are watching carefully, aware that the calm can break
without warning, especially in light of the upcoming critical Budget
and nervousness around the local elections next year.”
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