A political "black swan" event has emerged in the United Kingdom. On the evening of February 9th, Tim Allen, the Director of Communications for UK Prime Minister Keir Starmer, resigned, marking the departure of the second senior official from the Prime Minister's office within 24 hours. This followed the resignation of Morgan McSweeney, the Prime Minister's Chief of Staff, who stepped down due to his involvement in the appointment of Peter Mandelson, the former UK ambassador to the United States, whose connection to the Jeffrey Epstein case prompted the action.

The political instability immediately impacted financial markets. The UK's FTSE 100 index declined, the British pound fell against the euro, and the yield on UK 10-year government bonds rose, nearing its highest level since November of the previous year. Concurrently, hedge funds are actively using the options market to place significant bets on a further weakening of the pound.

This situation has led to a simultaneous downturn in UK stocks, bonds, and currency. In his resignation, Tim Allen stated his departure was to "create space for a new team to be built in No. 10." A day earlier, Morgan McSweeney resigned, accepting full responsibility for recommending the appointment of Peter Mandelson as ambassador to the US, which he admitted was an error that had "damaged" the Labour Party and the UK's interests.

Prime Minister Starmer recently addressed the controversy surrounding Mandelson's links to the Epstein case, apologizing to the victims and stating he had been misled by Mandelson's "lies." Mandelson was removed from his ambassadorial post last September after just seven months, following revelations of his close association with Epstein. Recent reports also allege that Mandelson and his partner received payments from Epstein and provided him with sensitive information.

Media analyses suggest that the resignation of McSweeney, a key architect of Labour's 2024 election victory and a close aide to Starmer, places the Prime Minister's political future in a precarious position.

The crisis quickly spread to financial markets. The FTSE 100 index continued to weaken, while the pound fell sharply against the euro. Yields on UK government bonds increased. Hedge funds are notably positioning for sterling's decline through the options market. A senior banker indicated significant one-way flow into euro-pound call options. Trading volume for these options recently hit a multi-year high, with call volume exceeding put volume substantially.

Implied volatility for the coming month is at its highest level since December. Major financial institutions have issued bearish forecasts for the pound against the euro over the next year.

The resignations are seen as a significant blow to Prime Minister Starmer. Following McSweeney's departure, two deputy chiefs of staff have been appointed as acting chiefs. The Prime Minister's office indicated Starmer may address the nation regarding the government's agenda.

Reports suggest officials are preparing for potential private calls for the Prime Minister's resignation from within the cabinet. An aide to a cabinet minister estimated the odds of Starmer surviving the week at only fifty-fifty. Tim Allen's resignation statement hinted that further changes might be imminent.

Investors are reacting negatively to the prospect of leadership changes, particularly concerned that successors may not uphold fiscal discipline. This has contributed to rising government bond yields. A market strategist commented that while the resignation of a top advisor might buy Starmer some time, widespread discontent among lawmakers and poor polling create significant uncertainty for his administration.

Activity in the options market shows a clear preference for positions that benefit from a stronger euro against the pound, indicating market perception of tail risks skewed towards sterling weakness. Although significant interest is focused around local elections in May, activity in April contracts is also notable, suggesting early hedging or positioning.

A foreign exchange strategist suggested that, assuming the US dollar avoids another major sell-off, the euro could rise against the pound by mid-year, while sterling may weaken against the dollar. A leadership challenge for Starmer, initially expected after the May elections, now potentially could occur sooner.