The pound fell and the UK government’s borrowing costs rose at the end of last week, as investors reacted to deepening political turmoil within the governing Labour Party.
Sterling lost about 1.3 per cent against the US dollar over the week, and yields on UK government bonds, known as gilts, moved higher on Friday as markets weighed the prospect of a prolonged leadership struggle.
The selling followed a week in which more than 80 Labour MPs called on Prime Minister Keir Starmer to resign, a cabinet minister quit and several junior ministers stepped down, without producing a resolution.
Higher gilt yields raise the cost of government borrowing, an unwelcome development for a Treasury already navigating weak growth and the inflationary effects of an energy shock linked to the war with Iran.
Currency strategists said the moves reflected a risk premium attached to UK assets rather than outright panic, with investors reluctant to commit while the question of the country’s leadership remains unresolved.
The reaction was a reminder of how closely financial markets are watching Westminster, where a contest to lead Labour, and potentially the country, could now run for months.