Sterling slipped further on Tuesday as escalating domestic political pressure on Prime Minister Keir Starmer widened the pound's negative premium just hours before a closely watched U.S. inflation report. As of 08:32 ET (12:32 GMT), GBP/USD was trading down 0.71% at 1.3514, while EUR/USD eased 0.37% to 1.1738.
The immediate driver for the British currency was a sharp deterioration in the political backdrop after Home Secretary Shabana Mahmood joined more than 70 Members of Parliament in publicly calling for Starmers resignation. That coordinated pressure has shifted market attention toward the prospect of a change in leadership and the policy uncertainty that could follow.
Bookmakers and betting markets are now placing a high probability on Starmer leaving office this year. ING flagged that investors are likely to treat any upcoming address from the prime minister as a potential resignation announcement, elevating event risk for sterling ahead of any formal statement.
Cross-rate dynamics are already reflecting a nascent political risk premium. ING's model identifies a modest short-term overvaluation in EUR/GBP - roughly 0.3% - indicating that the pound still has scope to accumulate a larger negative premium if leadership uncertainty accelerates. Market participants have singled out Andy Burnham, Wes Streeting and Angela Rayner as the main contenders to succeed Starmer, with particular sensitivity to Burnham's fiscal outlook.
Beyond UK politics, the dominant market focus for global FX and the dollar this session is the April U.S. consumer price index. ING's forecast calls for a headline monthly print of 0.9%, which would be the second consecutive monthly increase at that pace and would lift the year-on-year rate to 4.0% - materially above the 0.6% monthly and 3.7% annual consensus. ING attributes much of the projected headline jump to stronger gasoline and diesel prices.
ING sees the core CPI reading rising more modestly, by 0.3% month-on-month, consistent with a 2.7% year-on-year rate in line with consensus. The firm cautions, however, that even a hotter-than-expected headline number may not be sufficient on its own to produce a sustained boost to the dollar. The critical question, ING argues, is whether higher inflation prints, coupled with the ongoing stall in U.S.-Iran negotiations, will finally undermine the resilience of equity markets.
Recent patterns suggest the greenback tends to benefit when equities weaken. ING therefore views the equity channel - how inflation surprises translate into equity market moves - as a more likely mechanism to influence the DXY index than rate differentials alone. In short, a sharp equity correction could be the conduit through which CPI surprises lift the dollar.
Geopolitical developments remain an overlay to the inflation-related event risk. Former President Trump described the ceasefire as "on life support," and reports of renewed military activity in the Strait of Hormuz have helped keep oil prices elevated. ING warned that a prolonged U.S.-Iran stalemate would increase medium-term upside risk for the dollar by acting as a sustained drag on global growth.
For EUR/USD, ING retains a bearish-leaning stance. While the euro has so far held up on resilient risk sentiment, ING cautions that any meaningful correction in equities would be incompatible with current EUR/USD levels. Todays eurozone ZEW surveys are expected to show a further deterioration in German sentiment, and ING judges that a break above 1.1800 would be unsustainable in the present environment. A near-term retest of 1.1700 remains the more likely outcome according to the bank's view.
In sum, sterling's retreat reflects a mix of domestic political uncertainty and broader risk dynamics ahead of a key U.S. inflation release. Market participants will be watching both the Prime Minister's next moves and the CPI print closely, with the interaction between inflation surprises, equity markets and geopolitical tensions likely to dictate near-term FX flows.