The 7 May UK local elections delivered one of the most severe setbacks for a governing party in decades. Labour lost 1,496 councillors and control of 38 councils, while Reform UK made significant gains across traditional Labour strongholds. The party also lost power in Wales for the first time.

Markets focused less on the result itself and more on what a potential leadership change could mean for fiscal policy. Figures frequently mentioned as possible successors to Keir Starmer, including Angela Rayner and Andy Burnham, are generally viewed as more open to loosening borrowing limits, increasing public spending, and challenging Chancellor Rachel Reeves’ deficit reduction strategy.

With UK public debt approaching 100% of GDP and gilt issuance expected to exceed £250 billion this fiscal year, even modest fiscal expansion would enter a market with limited tolerance for additional supply. Sterling came under immediate pressure, with three month GBPUSD implied volatility rising to around 9%.

Starmer’s statement on Friday that he would not resign helped stabilize the pound, which recovered 0.5% to 1.3616 as markets concluded that Reeves’ role as the government’s fiscal anchor remained intact for now. Looking ahead, the key risk for sterling is not the election result itself, but what it signals about political stability. Any credible leadership challenge linked to looser fiscal policy would likely trigger renewed downside pressure.

Thursday’s Q1 GDP release is the key event for the pound this week. A weak reading would likely place GBPUSD back under pressure, adding to existing political risks and exposing the currency to dual headwinds: political uncertainty and slowing economic momentum amid persistent energy driven inflation.

The 10 year gilt continues to trade at a premium to US Treasuries, reflecting compensation for UK specific risk. If GDP disappoints, markets may reassess both the Bank of England’s rate path and sterling’s near term valuation, potentially pushing GBPUSD toward the lower end of its recent range. Conversely, a stronger print could support further recovery, opening the door to a move above 1.37 and reinforcing expectations that the economy remains resilient despite political turbulence.

Technical Analysis

The US dollar strengthened this morning after another proposed peace agreement was rejected, pushing GBPUSD down 0.34% to 1.3584. Buyers quickly emerged, lifting the pair from the session low at 1.3548.

On the daily chart, GBPUSD remains within a broad range established since last spring between 1.3150 and 1.3800. Current levels near 1.3600 place the pair roughly 70% toward the upper boundary. The bullish impulse that began on 7 April remains intact, and the broader structure continues to show higher lows, indicating gradual improvement in trend formation.

GBPUSD, 1h, Mar 20226 – Now

On the hourly chart, the bullish leg that started on 27 March remains visible, although momentum has stalled near the 1.3600 area, a key weekly resistance zone. The pair reached 1.3650 in early April but failed to extend higher, forming slightly lower highs and a flag like structure.

Today’s opening near 1.3550 is notable as it aligns with a tentative bullish trendline. A break below this level could open the path toward 1.3515. On the upside, the 1.3610 to 1.3630 zone remains the key resistance area, with potential for a retest of recent highs.

For now, the bullish bias remains intact, although uncertainty surrounding the upcoming GDP release is elevated, particularly given the gradual slowdown in quarterly growth observed in recent periods.