GBP/USD slumps over 1% as UK political turmoil triggers market sell-off

The British Pound (GBP) weakens against the US Dollar (USD) on Wednesday, with GBP/USD sliding over 1% on the day from its highest level since October 2021. The pair is trading near 1.3593 during the American session, as political and fiscal jitters weigh on Sterling sentiment.

The decline in Sterling was triggered by fresh political uncertainty in the UK. Prime Minister Keir Starmer was forced to scale back his government’s welfare reform plan after facing a major rebellion from within his own party. Nearly 50 Labour MPs voted against the bill, forcing a retreat that erased billions in expected savings and raised concerns about how the government will balance the budget.

Markets were also rattled by speculation over the future of Chancellor Rachel Reeves, who appeared upset during Prime Minister’s questions. Although Downing Street confirmed she has the full support of the Prime Minister, he stopped short of guaranteeing she would remain Chancellor through the next election. This added to the uncertainty already building in markets, as investors worry about the stability of the UK’s leadership and economic direction.

The political turmoil spilled into financial markets, sparking a sell-off in UK government bonds. Yields on 10-year gilts jumped over 20 basis points — the biggest daily move since October 2022 — as traders worried the government may now struggle to control public finances. The jump in yields means the UK will face higher borrowing costs when issuing new debt, adding pressure to the Treasury. Higher borrowing costs reflect growing doubts over how the UK will manage its debt without raising taxes or cutting spending.

The bond market's reaction suggests fading confidence in the government’s fiscal plan, and there’s a growing risk that official growth forecasts could be revised downward. With political uncertainty still high and no clear plan to fix the budget gap, the Pound could face more downside in the near term.

The US Dollar, on the other hand, is holding firm and showing a modest recovery despite the weaker-than-expected ADP Employment Change report. While the report pointed to a slowdown in private-sector hiring for June, markets appear to be looking past the soft figures. The US Dollar Index (DXY), which tracks the value of the Greenback against six major currencies, is trading with a slightly positive tone, reclaiming the 97.00 mark during the American session.