The pound sterling is poised for its steepest weekly decline in a year and a half, primarily driven by speculation surrounding a potential leadership challenge within the Labour Party. As political tensions rise, City traders are reacting to the news that Manchester Mayor Andy Burnham may soon contest Keir Starmer’s position as the party leader, further destabilising the UK’s economic landscape.
Sterling Takes a Hit
On Friday, the pound dropped approximately 2.2%, equating to a three-cent fall, settling at $1.332—the lowest it has been in five weeks. This downturn marks the biggest weekly drop since November 2024, following the election of Donald Trump. The currency’s decline has been consistent throughout the week, exacerbated by the announcement that Burnham plans to run for the parliamentary seat in Makerfield, a constituency in the north-west.
Kathleen Brooks, research director at XTB, noted, “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.” In contrast, the impact of Wes Streeting’s resignation from the party did not trigger similar turmoil in the currency markets.
Rising Borrowing Costs
Compounding the currency woes, UK government borrowing costs have surged amid broader concerns regarding economic stability. Bond yields have risen sharply, with UK 10-year bonds hitting 5.18%, the highest level since 2008. Meanwhile, 30-year bonds also saw a significant increase, reaching 5.85%. This rise reflects a growing anxiety among investors about Burnham’s potential premiership, which they fear could lead to a relaxation of fiscal discipline and increased public spending.
Neil Wilson, an investment strategist at Saxo UK, remarked on the precarious state of the bond market: “Ultimately, the bond market is likely to impose fiscal discipline, but it can get messy before that happens. The UK’s fiscal position gets increasingly fragile every day that the Strait of Hormuz is shut.”
Political Landscape and Market Reactions
The prospect of Burnham’s leadership has left investors wary. Mark Dowding from RBC BlueBay Asset Management expressed that Keir Starmer’s tenure is in jeopardy, warning that UK financial assets and sterling are likely to face a prolonged period of elevated political risk. The potential shift in leadership could lead to significant changes in Labour’s fiscal policies, adding to the uncertainty in the markets.
However, Burnham’s popularity among the public may offer a glimmer of hope. Bill Diviney, head of macro research at ABN Amro, noted that Burnham is currently the only major politician in the UK with a net positive approval rating, according to YouGov polling. “A factor that would significantly help is if Rachel Reeves keeps her role as chancellor,” Diviney added, highlighting that this would signal continuity and a commitment to fiscal stability.
Navigating the Challenges Ahead
While Burnham’s intention to challenge Starmer may energise some factions of the Labour Party, it remains to be seen how this will play out politically. He faces the immediate task of winning a parliamentary by-election in a constituency where the Reform UK party has shown strength in local elections. The sitting MP, Josh Simons, has a slim majority of just over 5,000 votes, making this a challenging but crucial step for Burnham.
Why it Matters
The current volatility in the pound and the rising costs of government borrowing underscore a critical juncture for the UK economy. With leadership contests often leading to uncertainty, the implications of a potential shift in Labour’s direction could reverberate throughout the financial markets, influencing everything from currency stability to government borrowing costs. As investors keep a close eye on political developments, the outcome of Burnham’s challenge could define the economic landscape for years to come.
