Nomura’s Dominic Bunning highlights that British Pound (GBP) has reacted calmly to Keir Starmer’s resignation, with investors focusing on the prospect of Andy Burnham becoming Prime Minister and his choice of Chancellor. Bunning argues that GBP’s medium-term path will be driven more by the BoE’s relatively dovish reaction function and narrowing policy rate differentials than by UK political developments, though fiscal-rule changes and tax hikes remain key tail risks.

BoE policy seen driving GBP path

"The FX market has taken the news of Keir Starmer’s resignation rather calmly, with GBP actually outperforming on signs that the new Prime Minister may be appointed rather than elected, thus potentially softening the risk of any eye-catching and GBP-negative headlines from the campaign trail."

"From a political and fiscal perspective, two issues stand out to us as ongoing tail risks for GBP."

"More broadly, cyclical dynamics are at the heart of our view of GBP underperformance and long EUR/GBP trade idea."

"We have long thought the BoE’s reaction function would be more dovish than many of its peers."

"Our baseline forecasts see policy rate differentials narrowing by 125bp by the end of 2027 (75bp ECB hikes, 50bp BoE cuts)."

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