EUR/GBP Surges as Markets Price “Zombie Government” Risk as Starmer Crisis Deepens

Markets reacted sharply to a deepening Labour leadership crisis as sterling plunged and UK 10-year gilt yields jumped above 5.1%, with traders increasingly pricing a weakened or “zombie” government. The immediate trigger was junior minister Miatta Fahnbulleh’s resignation and reports that more than 80 Labour MPs have demanded Keir Starmer step down or set a departure timetable, making a full leadership contest appear likely. The political stress is amplifying economic worries—higher oil prices, rising borrowing costs and fiscal pressures—prompting a risk premium on UK assets. Technically, EUR/GBP broke out above 0.8676 (fall likely ended at 0.8618), preserving a medium-term bullish structure with near-term targets at 0.8740 and, on a decisive break, a retest of the 0.8863 2025 high.