The British pound weakened on Monday as political uncertainty in the United Kingdom combined with rising expectations of further interest rate cuts to pressure the currency across major pairs.
Sterling fell sharply against the euro, sliding to 87.22 pence from around 86.80 pence earlier in the session, its weakest level in nearly two weeks.
The move reflected growing investor caution as political developments in London unsettled UK assets.
Against the U.S. dollar, the pound dipped to $1.3607, down from approximately $1.3635 before selling pressure emerged. While the decline against the dollar was more modest, traders said sentiment toward sterling remained fragile.
Markets reacted to mounting political strain facing the UK government, following the resignation of a senior aide to Prime Minister Keir Starmer and intensifying scrutiny over recent political appointments.
With local elections approaching and further disclosures expected, investors grew wary of potential instability at the top of government.
UK government bonds also underperformed their European counterparts, reflecting broader concerns that political uncertainty could complicate fiscal and economic policymaking.
Currency traders typically demand a higher risk premium during periods of political turbulence, a dynamic that weighed heavily on sterling.
Pressure on the pound was amplified by shifting expectations around monetary policy. Last week’s decision by the Bank of England to hold interest rates was closer than anticipated, prompting markets to increase bets on additional rate cuts later this year.
In contrast, the European Central Bank is widely expected to keep policy steady, making the euro more attractive on a relative basis.
“Sterling remains vulnerable,” said Chris Turner, head of global markets at ING. “Political uncertainty is rising, and when combined with a more dovish tilt from the Bank of England, the pound struggles to find support.”
Options markets reflected the shift in sentiment. Three-month risk reversals , a key gauge of currency positioning, moved sharply in favour of the euro, indicating increased demand for protection against further sterling weakness.
Analysts warned that pressure could persist in the near term as investors assess political risks alongside economic data and central bank signals. With elections looming and monetary policy expectations diverging across major economies, traders said the pound is likely to remain sensitive to headlines.
For now, sterling’s decline underscores how political uncertainty and interest rate outlooks can quickly reshape currency flows, leaving UK assets exposed to further volatility.
