Deutsche Bank’s Shreyas Gopal notes that markets had largely anticipated Andy Burnham becoming UK Prime Minister by the Autumn Budget, leaving the risk premium in Sterling broadly unchanged. The next key driver for the Pound is who becomes Chancellor, with Wes Streeting viewed as relatively market-friendly versus Ed Miliband. Deutsche Bank highlights that UK fiscal challenges and potential tax debates will likely resurface later this summer regardless of leadership changes.

Sterling risk premium and UK politics

"What are the implications for the pound? Our updated chart on the risk premium in sterling shows little change over the course of the past two weeks. Indeed, we would argue that for the past few weeks, markets have already been trading under the assumption that Andy Burnham would be Prime Minister in time for the Autumn Budget, as now appears to be all but confirmed."

"The next focus for the markets will likely be on who becomes the next Chancellor. Former Health Secretary Wes Streeting’s decision not to contest for the leadership has coincided with his implied probability of replacing Rachel Reeves increasing this morning. Broadly speaking, we believe he would be seen as amongst the more market-friendly candidates."

"By contrast, at the time of writing, prediction markets assign a c. 20% chance to former Labour Leader Ed Miliband. He is generally considered the most left-wing of the potential candidates."

"To be sure, the underlying fundamentals and macro questions for the UK outlook remain the same. To that end, it is likely that headlines around the size of the UK’s fiscal hole, its fiscal rules, and potential need for tax rises return later this summer, independent of who is in Number 10 and Number 11 Downing Street. However, we would not fully dismiss the importance of the signalling to the market in the decision."

"In bond space, our rates colleagues note that gilts have not seen the same degree of flattening as peers over the week, with risk premium in bond space still in place. As such, while our measures show there’s less bad news priced directly in the currency, for now the risk-reward remains skewed towards a grind firmer in the pound vs select, other risk-sensitive currencies. We stay long GBP/NZD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)