Even if Starmer stays, the pound will struggle

British Prime Minister Keir Starmer is receiving support from his cabinet members following the Epstein scandal surrounding a former ambassador, but the political storm hasn't subsided yet. The prospect of falling inflation also bodes ill for the pound.

Will the Epstein scandal soon engulf not only the British royal family but also the British currency? Prime Minister Keir Starmer is increasingly coming under fire for appointing Peter Mandelson as ambassador to the United States in 2024. At the time, he already knew that Mandelson had ties to sex offender Jeffrey Epstein. However, in recent days, the release of new documents has revealed that those ties were much closer than previously thought. Despite Mandelson's replacement last year, Starmer's chief of staff and head of communications have also resigned in recent days. Last Monday, Scottish Labour leader Anas Sarwar called on Starmer to resign as well.

Stoking political and fiscal fires
Since becoming prime minister in early July 2024, Starmer, along with Chancellor of the Exchequer Rachel Reeves, has succeeded admirably in maintaining a fiscally responsible course. He has done so at a time when right-wing Nigel Farage and his Reform UK party are further stoking the fires of immigration in British politics. A change of prime minister could significantly increase political and financial uncertainty in the United Kingdom. But even if the pressure on Starmer eases somewhat, the pound faces a difficult period. Currently, British inflation is higher than in other G7 countries. However, it is clear that this will change in the coming months.

Sharp drop in inflation
In the last month of last year, inflation across the Channel reached 3,4%. This is well above the official 2% target set by the Bank of England (BoE). High inflation usually triggers a rate hike from the central bank. However, the BoE doesn't need to do much to bring inflation down to or even below its target level. Government measures will result in a significant drop in energy bills for Britons in April. The water company is implementing a much smaller price increase than last year, while lower food, tobacco, and airline prices are also contributing to a sharp fall in inflation in the spring.

Weekend in London? Don't wait to book!
Falling inflation gives the central bank room to cut the policy rate twice in the coming months by 25 basis points. A lower interest rate makes it less attractive to hold assets in a currency. The increasing pressure on the pound does pose a risk for Dutch export companies that offer their British business partners the option of settling invoices in their own currency. But a weekend in London will also become somewhat cheaper. Just don't wait too long to book. The United Kingdom is seeking rapprochement with the European Union in many areas. If trade tensions are further smoothed over the course of 2026, this could give the British economy – and the pound – a boost.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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