Rabobank's Senior FX Strategist Jane Foley discusses British Pound (GBP) performance around United Kingdom (UK) political developments, focusing on potential leadership by Burnham and adherence to existing fiscal rules. Foley highlight calm in the gilt market but stress political and funding uncertainties. They expect EUR/GBP to move moderately higher over the next 1–3 months as Bank of England (BoE) rate hike expectations are repriced.

Political risks and BoE repricing

"Neither the gilts nor the pound posted much of a reaction to the speech by UK PM in-waiting Burnham yesterday. Burnham, who could become PM as soon as July 20 if no other candidate comes forward by the July 17 deadline, outlined his vision for the country in a speech centred on devolution. Crucially for markets, this included the reassurance that he would stick to the current Chancellor’s fiscal rules."

"This suggests that despite the calm in GBP markets since Burnham won the Makerfield by-election earlier this month, investors will be on alert for any signs that the purse strings may be loosened. Assuming Burnham does become UK PM, his choice of Chancellor is likely to provide a crucial signal to the market regarding the government’s fiscal stance. We continue to expect EUR/GBP to grind higher to 0.87 on a 1-to-3-month view."

"Political uncertainty can have a depressive impact on business confidence, investment and growth meaning that another change in PM just two years after a general election in the UK is not an optimal scenario for GBP markets. That said, the fact that PM Starmer has stepped down and that Burnham may be able to take the reins without a messy leadership election has removed some of the uncertainty that had been feared just a couple of weeks ago. For now, Burnham’s reassurances that he will stick to Chancellor Reeves’ fiscal rules has kept the gilt market calm."

"This points to the vulnerability of GBP should gilts suffer a bout of jitters. Latest CFTC speculators’ data has pointed to a surge in short GBP positions which may also be a reflection of political uncertainty."

"A further re-pricing of BoE rate hike expectations is likely to weigh on the pound. We see scope for a moderate move higher in EUR/GBP on a 1-to 3-month view."

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