The British pound is on track for its most significant weekly decline in 18 months, largely driven by speculation surrounding a potential leadership challenge to Prime Minister Keir Starmer from Manchester Mayor Andy Burnham. As political turbulence looms, traders are bracing for the implications of a possible shift in Labour’s leadership dynamic.
Political Turmoil Drives Sterling Down
On Friday, the pound fell by approximately three cents, or 2.2%, to settle at $1.332, marking its lowest value against the US dollar in five weeks. This decline stands as the most substantial weekly drop since Donald Trump’s election in November 2024. The currency’s consistent downward trajectory this week reflects growing unease within Westminster as Burnham declared his intention to seek parliamentary election in the Makerfield constituency, raising the prospect of a leadership challenge to Starmer.
Kathleen Brooks, research director at XTB, commented on the pound’s vulnerability, noting, “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 Investor Concerns
As political instability mounts, the UK government’s borrowing costs have surged, reflecting a broader sell-off in sovereign debt. Yields on UK 10-year bonds have jumped to 5.18%, the highest since 2008, while yields on 30-year bonds reached 5.85%. This increase comes amid rising oil prices, which have exacerbated inflation worries.
Investors are particularly wary of the implications a Burnham premiership might have on fiscal policy. In January, Burnham referred to the UK as “in hock to the bond markets” and caught in a “low-growth doom-loop.” While he has moderated his rhetoric in recent interviews, the spectre of increased government borrowing under his leadership looms large.
Mark Dowding from RBC BlueBay Asset Management informed clients that Starmer’s time in Downing Street may be limited, stating, “against this backdrop, UK financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period.”
The Road Ahead for Burnham
Before he can mount a challenge to Starmer, Burnham must first secure a byelection in Makerfield—a constituency where Reform UK has performed notably well. The current MP, Josh Simons, is stepping down, leaving Burnham with a slim majority of just over 5,000 votes to contend with.
Bill Diviney, head of macro research at ABN Amro, anticipates that speculation regarding potential shifts in fiscal policy will fuel further volatility in gilt markets. Despite the challenges, Diviney also highlighted Burnham’s popularity, noting that he currently holds the only net positive approval rating among major UK politicians, according to YouGov polling.
Crucially, the continuance of Rachel Reeves as Chancellor could provide a stabilising factor, signalling a commitment to fiscal rules that have, until now, kept market fluctuations relatively manageable.
Why it Matters
The ongoing political uncertainty surrounding Labour’s leadership could have far-reaching implications for the UK economy. As the pound falters and government borrowing costs rise, the potential for a shift in fiscal policy under a new Labour leader raises questions about the UK’s economic stability. Investors and consumers alike will be watching closely, as changes in leadership could either invigorate the economy or lead to further instability in a time of already heightened inflation concerns.
