The British pound is on track for its worst week in a year and a half, driven by growing speculation that Labour leader Keir Starmer may soon face a leadership challenge from Manchester Mayor Andy Burnham. This turmoil in UK politics, compounded by rising oil prices and inflation concerns, has led to heightened volatility in the currency markets.
Sterling Slides Amid Leadership Speculation
As of Friday, the pound has fallen approximately three cents, or 2.2%, settling at $1.332, marking a significant drop to its lowest point in five weeks. This decline is the most pronounced since November 2024, when Donald Trump was elected president of the United States. The continuous drop throughout this week reflects the uncertainty surrounding Starmer’s leadership, particularly following Burnham’s announcement that he intends to run for a parliamentary seat in Makerfield, a constituency in the north-west.
Kathleen Brooks, research director at XTB, commented on the situation, stating, “The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring. This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect.”
Rising Borrowing Costs Signal Market Concerns
Amidst this political uncertainty, government borrowing costs have surged. Yields on UK 10-year bonds soared to 5.18%, the highest level seen since 2008, while 30-year bonds also experienced a significant increase, reaching 5.85%. The broader sell-off in sovereign debt reflects investor fears that a potential Burnham premiership could lead to a loosening of the UK’s fiscal policies, resulting in increased borrowing for public spending.
Investor strategist Neil Wilson at Saxo UK noted that the bond market is likely to impose fiscal discipline, but warned, “Ultimately the bond market is likely to impose fiscal discipline, but it can get messy before that happens.” He also highlighted that the ongoing geopolitical tensions, especially around the Strait of Hormuz, are further exacerbating the UK’s already fragile fiscal position.
Burnham’s Bid for Leadership and Its Implications
Despite his popularity among the public, Burnham’s path to challenging Starmer is not without obstacles. He must first secure a seat in a byelection for Makerfield, where the local dynamics favour Reform UK and the Green Party, making his victory anything but certain. Bill Diviney, head of macro research at ABN Amro, noted, “Burnham is by far the most popular among the general public,” indicating that his approval ratings could bolster his chances.
However, Diviney also pointed out that Rachel Reeves retaining her role as Chancellor would be beneficial, as it would signal continuity in Labour’s fiscal approach and help stabilise market confidence.
The Financial Landscape Ahead
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