UK assets slide as political uncertainty mounts around Starmer

The British pound and UK government bonds came under pressure on February 5 amid growing political uncertainty surrounding Prime Minister Sir Keir Starmer’s leadership.

Sterling fell 0.7 per cent against the US dollar to $1.356 and weakened 0.5 per cent against the euro. The declines accelerated after the Bank of England held interest rates in a decision that was interpreted as tighter than expected, while signalling that further rate cuts remain likely, Caliber.Az reports via The Financial Times. 

UK government borrowing costs rose sharply, with the yield on 10-year gilts reaching around 4.6 per cent, the highest level since November.

Market moves were driven by rising concerns among investors over political risk in the UK, as speculation intensified about Starmer’s future following a deepening scandal involving Labour peer Peter Mandelson.

Starmer has faced mounting criticism from Labour MPs after admitting that he had sent Mandelson to Washington in February last year despite knowing that Mandelson had maintained a friendship with Jeffrey Epstein after Epstein had been jailed for child sex crimes. In an effort to contain the backlash, Starmer issued a public apology on February 5 during a speech in East Sussex, acknowledging responsibility for believing Mandelson’s assurances and appointing him.

“I am sorry for what was done to you, sorry so many people in power failed . . . sorry for believing Mandelson’s lies and appointing him," he said. 

Several Labour MPs and peers have since publicly suggested that the controversy could threaten Starmer’s premiership. The situation escalated further after emails released by the US Department of Justice showed Mandelson had passed UK government documents to Epstein while serving as a cabinet minister, and that he had previously received $75,000 from Epstein.

Opposition pressure also intensified, with Conservative Party leader Kemi Badenoch calling for a House of Commons vote of no confidence and describing Starmer’s position as untenable.

Investment managers noted that political risk had not been fully reflected in UK asset prices until now and said the speed at which the situation deteriorated had caught markets off guard. Analysts at major asset managers warned that the Mandelson scandal could represent a decisive blow to Starmer’s leadership, particularly given his long-standing lack of support within parts of the Labour Party.

The sell-off in UK government bonds threatens to disrupt the relative market stability that followed the autumn budget presented by Chancellor of the Exchequer Rachel Reeves, which had reassured investors about government borrowing levels. Market participants now fear that any successor to Starmer could pursue higher borrowing, a risk that had previously been expected to emerge only after regional elections scheduled for May.

Currency strategists said markets were beginning to price in the possibility that Starmer may not survive the political fallout from the Mandelson affair.

Analysts speaking to FT stressed that, in a broader global context, the release of new Epstein-related documents is unlikely to have a lasting impact on international financial markets. They noted that the disclosures are largely symbolic unless followed by concrete legal or regulatory actions. Some experts suggested the documents could prompt internal policy changes, isolated resignations, and short-term market volatility, but not systemic disruption.

By Sabina Mammadli