Sterling set to be haunted by the political ghost

UK political developments are looking set to return into the picture, especially with the latest happening in Manchester. The Gorton and Denton by-election saw a rather seismic result, with Labour losing a seat that they have held for nearly a century.For some context, the by-election was triggered after MP Andrew Gwynne resigned due to “significant ill health”. He was sitting as an independent after having been suspended by the Labour party.Starmer has already seen his support and popularity dwindle immensely and he grew even more unpopular in blocking Andy Burnham from running as the Labour candidate for the by-election. This was because Burnham looks to be deemed as a threat to Starmer, in trying to use this bid as a passage back to Westminster. Oof.In any case, the results were rather damning:Green (Hannah Spencer) – 40.6% (+27.4% swing)Reform (Matt Goodwin) – 28.7% (+14.6% swing)Labour (Angeliki Stogia) – 25.4% (-25.4% swing)Yes, Labour didn’t even finish second in a seat that they claimed a majority less than two years ago. It’s pretty much a collapse and this is akin to a referendum on Starmer’s leadership basically. Is this the tipping point for Starmer? Time will tell but it potentially could be.As political instability and a more messy political scene domestically starts to come back into the picture, the pound might find itself in a bit of trouble up ahead. That especially as UK economic conditions have been flagging at best in recent months.Now, Starmer isn’t going to resign and put things in chaos. However, a leadership transition looks to be in order at some point. So, it’s best to be prepared for that.Since hitting highs of around 1.3850 in late January, GBP/USD has struggled to keep afloat and is down 1.5% in February. That effectively also erases the gains seen in January more or less.And from the charts, we are moving towards a critical juncture with the pair now inching closer again towards a test of its 200-day moving average (blue line). Hold above that and the bias keeps more bullish for the pair. But break below that, and the bias shifts to being more neutral with eyes on key support at the 100-day moving average (red line) next.Looking ahead, there’s two ways to look at this. A leadership transition and political instability might see the BOE want to maintain order and keep monetary policy steady. That so as not to shake things up all too much.However, just be reminded that their mandate remains more focused on inflation and the economy. If the latter continues to struggle further this year with price pressures not exactly worsening and showing mild signs of easing (still not as much as hoped though), that might be enough to trigger the BOE to act regardless.That especially since a messier political scene will weigh on business and overseas investments to the UK. Hence, that will also weigh on economic output as things trickle down.At the balance, I’d wager the more chaotic political scene would be a net negative for the pound in the short-term. So, that will be a key factor to consider for the currency outlook as we get into the weeks/months ahead.
This article was written by Justin Low at investinglive.com.

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