Stammer or announcement of resignation as early as Monday! The pound approaches the 2026 low, potential candidates for the new prime minister trigger panic in the British bond market.

Note that the exchange rate of the pound is currently trading near its low for this year as market expectations for Prime Minister Keir Starmer to announce his resignation timetable in the coming days. The pound fell by as much as 0.4% to $1.3181 in early trade on Monday, approaching the 2026 low of $1.3159 reached in March, before recovering and remaining relatively stable throughout the day. If it falls below the March low, the currency will hit its lowest level since November last year. Insiders suggest that Starmer is expected to make a statement on Monday relinquishing power, though they also caution that this is not set in stone. Over the past three days, the Prime Minister has been weighing his options on whether to continue fighting Mayor of Greater Manchester Andy Burnham, who was recently elected as a Member of Parliament. For investors, the key question is what impact Burnham assuming the role of Prime Minister will have on the country's finances. So far, Burnham has made few clear statements on the potential policies he may implement, making it difficult to assess the consequences for future borrowing. Given the UK's current efforts to manage its debt levels, the market is nervous about any moves that may increase bond issuance in order to fund expenditure. "The market will closely watch Burnham's views on fiscal policy and whether there will be any relaxation of current fiscal rules," wrote a team including Sydney Federal Bank strategist Christina Clifton in a report to clients. They stated, "Any relaxation of fiscal rules may be met with resistance from the UK bond market," putting pressure on the pound. Strategist Mark Cranfield noted, "With ongoing political risks in the UK and forex traders looking for short currency hedges against a strong dollar, the pound could face further downside in the future. Given the poor performance of the pound against the dollar over the past month, this could push it towards the sprint high at the end of November last year, slightly above the 1.30 level." Options traders have already been deploying positions for a weaker pound. As a widely-used market sentiment indicator, the one-week risk reversal rate is currently near its most bearish levels for the pound in a month. Recently, the pound has been under pressure as Starmer's fate has come into question following a disastrous defeat in the May local elections. Additionally, market expectations for the Bank of England's interest rate hikes this year to be lower than the Federal Reserve have led to a depreciation of around 2.5% since the election on May 7th. Jennie Fly, head of FX strategy at Rabobank, wrote in a research report last week that pound investors have every reason to be nervous due to the potential "turmoil in the UK government bond market." "The UK currently relies on what former Bank of England Governor Carney once described as 'the kindness of strangers' (referring to reliance on foreign capital inflows), which increases the risk of significant volatility for the pound this summer."