Societe Generale economists reported rising political risk around Prime Minister Keir Starmer ahead of the 7 May local elections. They said a weak result could prompt a leadership challenge, with timing possibly extending to the September party conference.
Starmer faced and survived a parliamentary vote on whether he should be investigated for allegedly misleading Parliament over the appointment of Peter Mandelson as US ambassador. Betting markets put the implied probability of Starmer leaving office by end-2026 at around 66%.
Rising Political Risk Ahead Local Elections
News reports have speculated about a cabinet reshuffle after the local elections. The note also said there is no clear successor, which could affect the pace of any leadership move.
We are seeing a familiar pattern of political risk building around Prime Minister Starmer, much like we observed before the local elections in May of 2025. With the next round of local elections happening this Thursday, May 7th, the market is bracing for potential fallout. A poor showing for the Labour party could easily ignite speculation about a leadership challenge.
This uncertainty is causing a noticeable increase in implied volatility for UK assets. The FTSE 100’s volatility index, the VFTSE, has crept up to 15.2, reflecting trader nervousness heading into the vote. Historically, we’ve seen such political jitters lead to sharp, unpredictable market swings.
For currency traders, this means watching the pound very closely. We see one-month GBP/USD option volatility ticking higher as the pair struggles to hold ground above the 1.2500 level. Any sign of a weak result for the government could trigger a rapid sell-off in sterling.
Strategies For Navigating Market Volatility
This environment makes buying options on the domestically-focused FTSE 250 index an interesting play, as it is more sensitive to UK political turmoil than the multinational FTSE 100. A straddle, which profits from a large move in either direction, could be an effective way to trade the binary outcome of the elections. Such a strategy would capture upside from a surprise relief rally or downside from a political crisis.
Recent polling data, which shows Labour’s national lead narrowing to just 12 points from over 20 a year ago, adds credibility to the risk of a leadership challenge. We only have to look back to the market chaos following the mini-budget in 2022 to be reminded how severely UK political instability can punish gilts and the pound. Any challenge to Starmer would create a similar, if smaller, shock.
Even if a leadership challenge does not materialize immediately after this week’s vote, the threat will likely loom over markets until the Labour party conference in September. This suggests that holding longer-dated volatility positions could be a prudent strategy. The risk premium on UK assets is unlikely to disappear until the Prime Minister’s position is seen as secure.
