What UK By-election Results Could Mean for Cable?

A historic by-election win by the Greens in traditionally deep-Labour Gorton and Denton shakes Starmer's premiership ahead of key local elections and Reeves' Spring Budget.

The Latest Developments

• Starmer's leadership of Labour was dented after a major loss in a by-election put fiscal policy on the line.
• Chancellor Reeves is to give a small update at the Spring budget, hoping to calm the markets.
• Traders worry that higher inflation from the Iran conflict means the BOE won't be able to ease as much, and they cut back the chances of a March cut to 60%.

Shaking the Prime Minister's Foundations

The Gorton and Denton by-election last Thursday was a political shock but not a surprise given the polling going into the vote. The pound closed lower for the day, precipitating a multi-day losing streak that was only interrupted by the war in Iran, as investors sought to understand how the results would affect the political situation in London. Prime Minister Keir Starmer had recently survived a political crisis over his appointment of Lord Mandelson, who is linked to the Jeffrey Epstein scandal. At the time, it was widely speculated that Labour Party members were loath to rock the political boat ahead of key elections, including local polls in key constituencies on May 7th.

Pundits viewed the by-elections as potentially indicative of what might be expected in polls across England more broadly, given Starmer's approval rating at historic lows. The Greens won their first Westminster by-election ever (and their fifth MP) as left-leaning voters defected from Labour in favour of the Greens. The party had been courting voters who are increasingly frustrated with Starmer's position on Gaza and actively campaigned for the growing Muslim vote. Labour fell to third place behind Nigel Farage's Reform Party, a resounding defeat after winning the election by more than 50% previously. Although UK general elections are not slated until 2029, Starmer's leadership could come under renewed pressure from the left, who want a Prime Minister (and policy) more in line with their views. The US-Israeli invasion of Iran deepens the political crisis, as Starmer has to navigate Britain's most important military alliance (and having had Iranian drones attack its sovereign base in Cyprus) and the growing importance of the Muslim vote, which is being actively recruited by the Greens.

The Market Impact and Spring Budget

A potential challenge to Starmer's leadership of the Labour Party could send UK gilts soaring and drag on the pound as investors become nervous about fiscal policy. Chancellor Rachel Reeves only barely managed to right the nation's finances, and her future could be on the line. On Tuesday, she's expected to update her Budget, but has already suggested she won't announce any new policy. Instead, she will update forecasts with new OBR data. Markets were expecting three rate cuts from the BOE this year, but the potential inflation impact from the closure of the Strait of Hormuz brought this down to just two. Now, markets see only a 60% chance of a cut in March, compared to over 80% in the wake of the Gorton and Denton by-elections.

GBPUSD Tests 1.33 Handle Ahead of Budget Update

Despite the rate-cut chances falling, a stronger greenback has sent cable plunging to 1.3300 in early Tuesday trading, breaking outside the lower VWAP on the daily chart. If prices remain below the prior swing support at 1.3346, declines might continue, with the next support at 1.3250. Given that the RSI is about to penetrate the oversold region, a continuation to that level could offer a bounce. However, while prices remain below 1.3433 in the short term and the middle VWAP at 1.3538 in the short-to-medium term, the pound could stay under pressure.

Source: SpreadEx | GBPUSD, Daily Chart