Pound forecast: UK political instability vs Japan stability

UK assets are in focus, but for all the wrong reasons as calls for Keir Starmer to resign grows louder. So far, though, the GBP/USD has held its own rather well and the FTSE 100 has remained near record levels. Perhaps that’s only because of the ongoing risk rally across global markets, where stock indices are finding renewed support and the dollar coming under pressure. When you look at some of the pound crosses, that’s where you see the relative weakness. Political uncertainty hanging over the UK markets make us bearish on the pound forecast in the near-term, putting FX pairs such as EUR/GBP and GBP/JPY in focus.

 

Calls for Keir Starmer to resign grows louder

 

Calls for Keir Starmer to step aside are growing because the sense of control in Downing Street is clearly slipping. What began as awkward questions around the appointment of Peter Mandelson has now snowballed into something far more damaging, with fresh Epstein-related revelations reigniting concerns about judgement at the very top.

 

The real blow, though, is political rather than legal. Anas Sarwar, once one of Starmer’s closest allies, has publicly turned on him, making him the most senior Labour figure to do so. When someone who tied his own leadership so closely to the Prime Minister starts calling for change, it signals that internal confidence has cracked.

 

That’s been compounded by the resignation of Morgan McSweeney, Starmer’s chief of staff and key architect of his rise. Losing your most trusted lieutenant in the middle of a scandal is never a good look, and the departure of his communications chief soon after only reinforces the impression of a leadership in freefall.

 

For Sarwar, the timing is also strategic. With Scottish elections looming and Labour slipping in the polls, distancing himself from an unpopular Prime Minister makes political sense. In short, Starmer isn’t just facing a scandal – he’s facing a collapse in authority, and that’s far harder to survive in British politics.

 

Pound forecast: EUR/GBP gains ground as pressure mounts on Starmer

 

The big recovery in risk rally since Friday has benefitted the GBP/USD, making this a pair to trade if Starmer steadies the political ship in the UK. But the euro has been a standout winner, with many see Europe representing the most credible alternative to US markets in terms of size and liquidity. What’s more, the ECB last week seemed okay with a higher EUR/USD exchange rate. Meanwhile, growing political pressure on UK PM Starmer and a dovish-leaning Bank of England has weighed on the pound forecast against non-USD pairs. This should keep the EUR/GBP supported, which in turn would make the EUR/USD more favourable than GBP/USD.

 

 

On the euro side of things, there’s not much to look forward to this week. But with the ECB seemingly comfortable with the EUR/USD exchange rate, we could see the EUR/GBP continue to push higher now that it has broken out of its bearish channel. Support comes in around 0.8700, follows by 0.8650, marking the 200-day SMA. Upside targets include 0.8800 and then the November 2025 high at 0.8865.

 

GBP/JPY: Japan’s political stability boost for yen

 

In Japan, the Nikkei briefly jumped more than 5% following the LDP’s landslide victory. Traditionally, a big LDP win has been seen as bearish for the yen and Japanese bonds, on the assumption that it leads to looser fiscal policy and pressure on the Bank of Japan to stay dovish. So far, though, that hasn’t quite played out. The government has tried to calm bond market nerves by arguing that its temporary tax cuts won’t require fresh debt issuance. It looks like this story is turning quite in favour of Japan, with yen reversing impressively after starting the session lower overnight. Granted, some of that has to do with a weaker US dollar, but yen crosses such as GBP/JPY have also turned lower.

 

In fact, the GBP/JPY could be the best yen pair to potentially look for shorting opportunities if the ongoing UK political uncertainty gets worse, and we see Prime Minister Starmer resign.  In that case, investors may play the political stability of Japan against instability of the UK. Already, they view the LDP’s clean mandate as a chance to push through growth-friendly reforms in Japan.

 

 

We could therefore see the GBP/JPY break lower after finding resistance in the 214.30-215.00 region in recent trade. Support comes in around the 211.60 area, marking the high from December. Below that 209.00 and 210.00 area additional short-term levels to watch, followed by July 2024 high of 208.11.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R