By Renae Dyer

Sterling remained weaker even as U.K. government bond yields turned lower Tuesday as U.K. political concerns lingered.

Scotland Labour Party leader Anas Sarwar urged U.K. Prime Minister Keir Starmer to step down Monday, as pressure mounted on U.K. Prime Minister Keir Starmer over his appointment of former British ambassador to Washington Peter Mandelson.

However, Starmer's full cabinet rallied behind him along with former Deputy Prime Minister Angela Rayner, who is seen as a potential leadership rival.

Yields on 10-year U.K. government bonds, or gilts, fell three basis points in early European trade to 4.504% after rising in the previous session, according to Tradeweb data. Sterling fell 0.2% to $1.3667. The euro rose 0.2% to 0.8712 pounds after hitting a near three-week high of 0.8741 Monday, LSEG data showed.

Gilt yields remained elevated despite Tuesday's pullback as speculation about a leadership challenge for Starmer continued, Wealth Club chief investment strategist Susannah Streeter said in a note.

"After past political volatility and frequent changes at the top of government, the U.K. has been suffering from a risk premium," she said.

"The concern is that if Keir Starmer is ousted, there could also be a change of guard at the Treasury [where Rachel Reeves is treasury chief], potentially weakening adherence to strict fiscal rules on spending."

Starmer's fate was in question even before the revelations about Mandelson came to light as his popularity with the public has fallen. A recent Ipsos poll showed Starmer is liked by 20% of British citizens and disliked by 70%.

U.K. local elections in May are seen as key to determining Starmer's future.

There are fears Starmer's Labour Party will suffer significant losses at the local elections, Commerzbank analyst Michael Pfister said in a note.

"It remains questionable whether Starmer will still be prime minister by the end of the year, despite winning the 2024 election with a strong result and setting out to ensure stability," he said.

"This would leave a somewhat bitter taste, especially since the economy is now showing signs of recovery."

Even if Starmer remains in power, this would likely be achieved through appeasing the left of Labour, Jefferies economist Mohit Kumar said in a note.

That would potentially lead to a further deterioration in the fiscal position with populist rather than pro-growth policy measures, he said.

"Hence, we retain our negative view on U.K. growth and see the Bank of England delivering more [interest rate] cuts than priced in."

Jefferies continues to expect the gilt yield curve to steepen, whereby the gap between short and long-term yields would widen.

It doesn't expect sterling to benefit from a potentially weaker dollar and recommended selling sterling at levels between $1.38 and $1.40.

Write to Renae Dyer at renae.dyer@wsj.com

(END) Dow Jones Newswires

February 10, 2026 06:22 ET (11:22 GMT)

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