The Euro (EUR) strengthened against Pound Sterling (GBP) after renewed speculation surrounding Prime Minister Keir Starmer’s future added to concerns over UK political stability and the outlook for the British currency.

Currency analysts at Rabobank said Pound Sterling remains heavily driven by headlines surrounding Starmer’s leadership battle, warning that prolonged political uncertainty could push EUR/GBP higher over the coming year.

GBP initially recovered some ground during early European trade, but Rabobank said the rebound quickly faded as investors reassessed mounting tensions inside the Labour Party.

“The currency clearly remains beholden to news regarding the future of PM Starmer’s leadership,” Rabobank said.

Markets briefly stabilised after Starmer survived another night without a formal leadership challenge, although pressure on the Prime Minister intensified sharply earlier this week.

Rabobank noted that more than 80 Labour MPs have reportedly called on Starmer to resign, while four ministers quit the government yesterday.

The bank said reports suggesting Health Secretary Wes Streeting could resign and launch a leadership challenge “as soon as tomorrow” were adding further uncertainty for investors.

While Labour Party rules make removing an incumbent leader difficult, Rabobank warned the scale of internal divisions points to the risk of “a prolonged period of messy UK politics”.

“This hints at the possibility of a prolonged period of messy UK politics – something that the Labour party had promised to put a stop to,” the bank said.

UK Gilt Market Concerns Returning

Rabobank said political instability is increasingly spilling into UK financial markets, particularly the gilt market.

Although long-dated UK bond yields briefly steadied this morning, the bank warned further volatility remains likely if uncertainty drags on.

“Any wobble in the long end would also leave the currency vulnerable,” Rabobank said.

Investors are also reassessing Bank of England rate expectations.

Through March and April, Sterling was supported by a sharp repricing in UK interest rates as markets swung from expecting cuts to pricing multiple hikes following the Iran-driven energy shock.

However, Rabobank believes current pricing has become too aggressive.

“Currently the market is priced for three 25bp rate hikes on a one-year view. That said, in Rabo’s view this is too aggressive,” the bank said.

Rabobank argued that softer labour market conditions and growing spare capacity in the UK economy should ultimately limit the need for aggressive Bank of England tightening.

“A re-pricing in favour of one rate hike could weigh on the pound,” analysts added.

EUR/GBP Forecast: Rabobank Targets 0.89 as Pound Sterling Risks Grow

Rabobank continues to forecast the Euro to Pound exchange rate moving towards 0.89 over a 12-month horizon, implying broader Sterling weakness ahead.

The bank warned the UK’s large current account deficit leaves the Pound particularly exposed if political uncertainty combines with renewed gilt market stress or weaker growth expectations later this year.

The US dollar has rallied a little bit against the Japanese Yen, but we are getting a little bit stretched here. What I would like to see is a little bit of a pullback in order to find value so that we can take advantage of any cheap dollars that we can find.

The 50-day EMA sits just above the 150-yen level, and it is an area that I think will continue to be important—a little bit of a floor, if you will. Above, we have the 160-yen level, an area that I think a lot of people will have to watch closely due to the fact that we had seen the Bank of Japan intervene in that general vicinity. That being said, this is a situation I think you’re looking to buy dips, taking advantage of the interest rate differential and any value you can find.

GBP/USD Technical Analysis

• The Euro fell on Friday as interest rates in the United States continued to climb.

• That being said, interest rates in Germany have climbed as well, but really at this point I think a lot of traders are starting to get very nervous about this situation in the Middle East where traders have to wait for the next headline to determine whether or not there is any progress being made in the idea of finding peace.

I don’t see a lot of progress and sooner or later you have to worry about inflation via energy. Europe is in a much more vulnerable position than the United States is due to self-imposed green regulations and a moratorium on drilling of a lot of its resources. So, with that being the case, a lack of natural gas and crude oil is a toxic situation for Europe.

Vulnerability and support levels

If we bounce from here, which happens to be the 200-day EMA, it offers a short-term opportunity for those who might be willing to fade the selling pressure, but quite frankly I would prefer to see a bounce and signs of exhaustion that I can start shorting again.

I do believe that the EUR/USD pair is going to stay in the range it’s been in for some time and, for what it’s worth, the Euro is basically at the same price it was when it was introduced in 1990. In other words, with all the noise that we’ve had over the last couple of decades, it really hasn’t gone anywhere; it is worth the same as it was back then.

If we break down below the 200-day EMA we could go down to the 1.14 level, which I see as a massive support level, but I also recognize that the 1.15 level probably offers support as well. Rallies look suspicious to me at this point in time.

Ready to trade our EUR/USD daily forecast? Here’s a list of some of the top forex brokers in Europe to check out.

Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

As seen on: Pairs Of Aces Podcast,The Trader Guy, FXEmpire

The GBPJPY pair continued forming repeated negative trading, to confirm its surrender to the previously suggested bearish scenario by reaching 211.20, to form sideways fluctuating due to the contradiction of the main indicators to settle near 211.65.

Note that the stability below 213.50 barrier confirms the trading confinement within the bearish track in the upcoming trading, therefore, we will keep waiting for gathering extra negative momentum, to ease the mission of targeting 211.00 level, to attack 210.45 support, forming confirmation key for the upcoming trading.

The expected trading range for today is between 210.45 and 212.30

Trend forecast: Bearish