In a turbulent week for the British economy, the pound sterling is poised to record its worst performance in 18 months, driven by rising political uncertainty following hints of a potential leadership challenge to Keir Starmer from Manchester Mayor Andy Burnham. The currency fell sharply, reflecting concerns over the future direction of the Labour Party and its implications for UK fiscal policy.
A Week of Decline for the Pound
As of Friday, the pound had declined by approximately three cents, or 2.2%, against the US dollar, trading at $1.332—a five-week low. This drop marks the steepest weekly fall since the aftermath of Donald Trump’s election in November 2024. The currency’s decline has been exacerbated by ongoing leadership tensions within the Labour Party, particularly after Burnham announced his intention to run for parliament in the Makerfield constituency.
“The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring,” explained Kathleen Brooks, research director at XTB. She noted that Burnham’s candidacy appears less market-friendly compared to other potential candidates, suggesting that his leadership could introduce more economic volatility.
Rising Borrowing Costs Amid Political Uncertainty
Concerns over the Labour leadership have also resulted in a spike in UK government borrowing costs. Yields on 10-year UK bonds surged to 5.18%, the highest level since 2008, following a broader sell-off in sovereign debt. This increase in yields reflects investor unease about the potential for a Burnham-led government to relax fiscal rules and ramp up borrowing for increased public spending.
Neil Wilson, an investment strategist at Saxo UK, cautioned that while the bond market typically enforces fiscal discipline, the current political climate could lead to significant instability. “Ultimately, the bond market is likely to impose fiscal discipline, but it can get messy before that happens,” he remarked, highlighting the fragility of the UK’s fiscal position, especially in light of rising oil prices that are fuelling inflation concerns.
Burnham’s Bid for Leadership: A Double-Edged Sword
While Burnham’s popularity is noteworthy—he is currently the only major UK politician with a net positive approval rating according to YouGov polling—his economic views have led to apprehension among investors. Earlier this year, he described the UK as being “in hock to the bond markets” and caught in a “low-growth doom-loop.” Although he has moderated his rhetoric in subsequent interviews, his potential premiership raises questions about Labour’s fiscal strategies.
Mark Dowding of RBC BlueBay Asset Management indicated that Starmer’s position is increasingly precarious, suggesting that UK financial assets, including the pound, may experience a prolonged period of heightened political risk. “Keir Starmer’s days in 10 Downing Street are numbered,” he stated, reflecting the prevailing sentiment in the markets.
The Road Ahead for Burnham
For Burnham to mount a leadership challenge, he first needs to secure a seat in Parliament, which involves winning a byelection in Makerfield—a constituency where the Reform UK party performed well in recent local elections. The current Labour MP, Josh Simons, who is stepping down to facilitate Burnham’s return to Westminster, holds a majority of just over 5,000 votes, making this a critical battleground.
Analysts, including Bill Diviney from ABN Amro, predict that ongoing speculation surrounding Labour’s fiscal policy will keep gilt markets volatile. Diviney acknowledged Burnham’s popularity but noted that the stability of the party’s fiscal strategy would be essential to maintain market confidence. “A factor that would significantly help is if Rachel Reeves keeps her role as chancellor,” he stated, emphasising the need for continuity amid uncertainty.
Why it Matters
The current political landscape presents significant implications for both the British economy and the future of the Labour Party. As speculation surrounding Andy Burnham’s potential leadership continues, the resulting volatility in the pound and government borrowing rates underscores the intricate relationship between political stability and economic confidence. Investors and citizens alike are left to navigate this uncertain terrain, aware that the outcomes of upcoming elections could reshape the UK’s fiscal policy and economic trajectory for years to come.
