Sterling dipped on Monday amid mounting speculation that Prime Minister Keir Starmer could soon resign, potentially clearing a path for Andy Burnham to become Britain’s seventh leader since the 2016 Brexit vote.
The currency, which has shed approximately 3% since pressure on Mr Starmer intensified in February, was down 0.2% against the dollar, trading at $1.321. This uncertainty compounds Britain’s existing economic woes, including the highest borrowing costs among G7 nations due to high debt, interest payments, and years of anaemic growth.
Mr Starmer’s popularity has plummeted over his economic stewardship, with the threat to his leadership escalating on Friday after Andy Burnham, the former Greater Manchester mayor, secured a decisive parliamentary election victory, marking his return to Westminster.
Nomura economist George Buckley highlighted the key questions facing markets: “The most important question relates to Mr Burnham’s approach to fiscal policy, his pick of Chancellor and whether he will stick to the fiscal rules.”
Reflecting heightened investor concern, the options market indicates traders are now willing to pay more to hedge against potential volatility in the pound over the coming weeks compared to Friday.
Key for investors is the UK gilt market, where yields at around 4.85% are not far off their highest since the 2008 financial crisis, meaning Britain must pay more for its medium-term borrowing needs than any other developed nation.
Repeated political crises and concern over Britain’s stretched finances have made investors wary of gilts, which are prone to far higher volatility than many other government bonds.
Burnham is viewed as being more left-leaning than Starmer and although he has said he will stick to incumbent finance minister Rachel Reeves’ tight fiscal rules, investors will need to see proof. “Burnham has said that he would respect fiscal rules. However, it is not obvious where the money for any additional spending will come from. Taxes have reached a stage where further rise (s) … would be counterproductive. Efficiency savings look good on paper, but never realistically work,” Jefferies strategist Mohit Kumar said.
“We have stayed away from the long end of the gilts curve, have steepeners in our portfolio and have been underweight sterling. We are maintaining our view and expect further volatility in the UK long end over the coming days,” he said, referring to a position that assumes shorter-dated bonds will perform better than longer-dated ones, given the concern about Britain’s long-term finances.