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GBPUSD+ fell to its lowest levels so far in 2026 on UK political risks, hawkish Fed
Markets now expect smooth transition from Keir Starmer to Andy Burnham as UK Prime Minister
New PM inherits a slowing UK economy and severely strained government finances
Next week: Traders and investors worldwide eager for clues on UK fiscal outlook from Burnham
Bloomberg FX model: 74% chance GBPUSD trades between 1.250 - 1.390 by end-2026
Recall last week, the British Pound sank to the 1.3160 price region against the US dollar, matching its year-to-date lows last seen in late-March 2026.
Those recent declines were driven by 2 key factors:
NOTE: A currency tends to strengthen when markets believe that a country’s interest rates would rise faster than its peers, and vice versa.
With Keir Starmer now having officially resigned as UK Prime Minister, markets are expecting a smooth transition to 56-year-old Andy Burnham taking helm at Downing Street.
Such hopes helped GBPUSD+ rebound slightly back above the psychological 1.320 level, though still holding around its lowest levels so far in 2026.
Starmer’s resignation as UK PM comes less than two years after Labour’s landslide election victory.
Burnham, the former mayor of Greater Manchester, is now on a path to becoming the UK’s 6th Prime Minister in a decade.
The next UK Prime Minister could be installed anytime between mid-July at the earliest, through September.
Theresa May (July 2016 - July 2019): -5%
Boris Johnson (July 2019 - September 2022): -7.7%
Liz Truss (September 2022 - October 2022): -0.4%
NOTE: This seemingly small decline masks GBPUSD’s dramatic plummet to a record low of 1.0350 during Truss’s 49-day term as PM - the shortest in UK history.
Rishi Sunak (October 2022 - July 2024): +11.7%
Keir Starmer (July 2024 - June 2026): +3.4%
Next week, markets expect Burnham to make a speech on the economy, which could give markets their first clues on the incoming administration’s fiscal (spending and taxation) plans.
The next PM has to make some tough choices: cut spending, raise taxes, or borrow more.
From an economic and fiscal perspective, here’s what the new Prime Minister will inherit:
1) slowing economy
This would mark a deterioration following the UK’s stellar performance in Q1 when it achieved the fastest growth among G7 economies.
2) strained government finances
In May 2026, borrowings hit the highest of any May in the past 6 years (since the pandemic); the deficit came in at GBP 23.3 billion.
Annual borrowings stand above GBP 130 billion a year, while the deficit is close to 5% of GDP (the government spends more than it receives in taxes).
Public debt is already above 100% of GDP (it borrows more than it produces), with the annual interest bill alone topping GBP 100 billion (it costs the UK government more to service its debt than to run its schools).
The rising costs of welfare and public services, along with May’s debt interest reaching record levels, is placing further strains on the UK government to boost economic growth.
Traders and investors worldwide are also eager to discover Burnham’s choice for UK Chancellor of the Exchequer (Wes Streeting to replace Rachel Reeves?).
According to Bloomberg’s FX model, there’s a 74% chance that GBPUSD will trade between 1.250 - 1.390 by end-2026.
POTENTIAL SCENARIOS:
At the time of writing, markets expect:
vs.
Hence, the market’s consensus appears to lean “bearish” (expect more GBP declines ahead).
However, JPMorgan this week just reinstated its “bullish” view (expect GBP to climb) after holding a “neutral” view in the lead up to last week’s by-election.
Given the “hawkish” Fed, the prospects of a stronger US dollar looms large over the rest of the FX universe in the months ahead, likely limiting GBPUSD's gains.
Should UK political and fiscal risks spike once more, perhaps on rising uncertainties or even a market revolt over the next PM’s fiscal policies and/or choice for Chancellor, that may further weaken GBP in the 2nd half of the year.
DISCLAIMER:
This article is provided for general information and reflects the author’s views only. It does not constitute investment advice, nor an offer or solicitation to buy or sell any financial instruments or digital assets. Your ability to access or use any products or services mentioned may be subject to the laws and regulatory requirements of your jurisdiction.