MUFG’s Lee Hardman explains that the Pound (GBP) is softer despite stronger-than-expected United Kingdom (UK) Gross Domestic Product (GDP), as markets anticipate slower growth later in the year due to the energy price shock. He stresses that rising UK political risks, including a potential Labour leadership challenge and concerns over future fiscal policy, are weighing on UK gilts and the Pound despite favourable carry conditions.

UK politics weigh on Pound outlook

"The pound continues to trade on a softer footing this morning despite evidence revealing that the UK economy expanded more robustly than expected at the start of this year."

"Stronger UK cyclical momentum alongside higher UK yields and favourable conditions for carry trades have helped to the pound to surprisingly outperform so far during the Middle East conflict."

"Slower growth in the coming quarters appears likely again in response to the energy price shock."

"However, downside risks for the pound have increased in the near-term in response to heightened political uncertainty in the UK."

"The survey indicates that a soft left Labour candidate is most likely to replace Keir Starmer if a leadership contest takes place which would create more unease over UK fiscal risks weighing on gilts and the pound."

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