The pound is struggling to build on its recent gains as a toxic combination of political scandal, an energy-driven inflation shock and looming local elections keeps sterling markets on tenterhooks.
The traders are betting that the next week could prove decisive for both the currency and Prime Minister Keir Starmer’s political future.
Sterling is trading at around $1.35 against the dollar — down from highs above $1.358 earlier this month — and at approximately £1 to €1.15 against the euro, with both pairs reflecting uncertainty over the domestic political and rate outlook.
Why sentiment has shifted
The dominant driver of sterling’s softness is the continuing fallout from the Peter Mandelson affair.
Mandelson was dismissed as British ambassador to the United States in September 2025, following the publication of emails showing he had maintained a supportive relationship with convicted sex offender Jeffrey Epstein after the latter’s 2008 conviction.
On 23 February 2026, days after Andrew Mountbatten-Windsor was arrested on suspicion of misconduct in public office, Mandelson was also arrested on suspicion of the same offence.
He was released on bail and has not been charged. He has not commented on the specific allegations.
Starmer narrowly survived a critical parliamentary vote to block a standards inquiry into the Mandelson affair, though the scandal has deeply damaged his standing, with cabinet divisions and public criticism intensifying.
He now faces a further vote on whether to launch an investigation into his assurances to Parliament regarding Mandelson’s appointment.
Election week, volatility and positioning
Options markets are pricing elevated uncertainty ahead of the 7 May local elections, with two-week implied volatility in sterling rising sharply above its one-month equivalent.
Recent polls show Reform UK surging to 21% nationally, edging out Labour at 17% and the Conservatives at 18%.
Labour is defending more than 2,500 council seats, going into the elections with consistently low poll ratings.
Prediction markets are treating the local results as a potential catalyst for a leadership challenge.
Labour MPs are expressing discontent amid dismal polling, with the May local elections looming as a potential trigger for a leadership challenge or no-confidence motion if significant losses occur.
MUFG strategist Guy Hardman has noted that a credible leadership challenge would be “a reason to sell the pound.”
Rates, yields and the inflation shock
The rate outlook has been fundamentally reshaped by the US-Iran war and the resulting surge in energy prices.
The Bank of England has held its base rate at 3.75% since February 2026, pausing its cutting cycle after the Iran conflict triggered a fresh energy-driven inflation shock.
The BoE is widely expected to hold again at its meeting on Thursday, 30 April, with all 62 economists in a Reuters poll forecasting no change.
UK CPI came in at 3.3% in March, in line with expectations and within the BoE’s own 3%–3.5% quarterly projection, though services inflation remains sticky at 4.5%.
Lloyds revised its 2026 UK inflation forecast upward to 3.4% from 2.6%, while slashing its GDP growth estimate to 0.5% from 1.2%, and no longer expects any Bank of England rate cuts this year.
Far from easing, gilt markets have come under renewed pressure.
UK 10-year gilt yields climbed above 5%, approaching levels last seen in 2008, as investors weighed revised economic forecasts and awaited the BoE’s decision, alongside developments in the US-Iran standoff.
Markets are still pricing in almost three quarter-point BoE rate hikes over the course of 2026.
The oil overhang
Elevated crude prices remain a key headwind for the UK economy and for sterling’s rate-sensitive dynamics.
Bank of England Governor Andrew Bailey told the BBC that the world is facing a “very big energy shock” that will push up prices, though he cautioned that the bank would not rush to raise rates, describing the decision as “very, very difficult.”
Starmer has confirmed he intends to lead Labour into the next general election, which must be called by mid-2029 at the latest.
But with the local elections just days away, gilt yields near multi-decade highs and the Mandelson scandal continuing to drain political capital, the near-term path for sterling remains fraught.
If Labour suffers heavy losses on 7 May, pressure on the prime minister’s position could intensify rapidly — and with it, renewed volatility for the pound.
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