07:03 AM EST, 11/13/2025 (MT Newswires) -- Sterling (GBP) has continued to underperform at the start of the European trading session following the release of Thursday's weaker-than-expected United Kingdom Q3 gross domestic product, said MUFG.

It has resulted in EUR/GBP rising to a fresh high of 0.8844 as the pair extends its advance above the 0.8800 level this week, wrote the bank in a note to clients.

The report revealed that the U.K. economy slowed more than expected in Q3 when it expanded by just 0.1% quarter over quarter, stated MUFG. It was the second consecutive quarter of slower growth following expansions of 0.7% in Q1 and 0.3% in Q2.

It was the slowest quarter of growth since Q4 2023, pointed out MUFG. The Bank of England staff had been expecting growth of 0.2% in Q3. Weaker growth was driven by weakness in the manufacturing sector, which was hit by JLR's cyberattack shutdown. The manufacturing of vehicles was down 28.6% month over month in September.

There was also evidence of the negative impact of President Donald Trump's tariffs, with United States goods exports falling by 11.4%. Slowing growth momentum and weakness in the labor market are encouraging market expectations for more active BoE easing, putting downward pressure on U.K. yields and sterling heading into the Fall Statement, added the bank.

A significant package of fiscal tightening measures is expected to be announced on Nov. 26, putting a dampener on economic growth, noted MUFG.

At the same time, sterling was undermined on Wednesday by heightened political uncertainty in the U.K., added the bank. Prime Minister Keir Starmer's position as Labour Party leader is coming under closer scrutiny in light of the party's poor performance in the polls and his own dismal approval ratings, which are among the lowest ever recorded for a U.K. premier.

The rolling out of fiscal tightening measures in the Fall Statement is unlikely to improve his popularity and could trigger a leadership challenge, according to the bank. It has already been reported that the Mayor of Manchester, Andy Burnham, is considering a leadership challenge and Health Secretary Wes Streeting is the latest to emerge as another potential challenger.

In order to trigger a formal leadership challenge, a challenger must be a sitting Labour member of parliament (MP), which currently rules out Andy Burnham, and requires support from at least 20% of Labour MPs. Labour currently holds 405 seats in parliament, so the threshold is 81 Labour MPs.

The local elections in May 2026 could be the key test of PM Starmer's leadership. MUFG expects sterling to weaken further if markets move to price in a higher political risk premium.