The British pound is on track for its worst weekly performance in a year and a half, as speculation mounts over a potential leadership challenge to Keir Starmer by Manchester Mayor Andy Burnham. As political tensions rise, traders have reacted by pushing the pound down to a five-week low against the US dollar, reflecting broader concerns about the UK’s economic stability.
Political Turmoil Influences Currency Markets
This week has seen the pound fall approximately three cents or 2.2%, settling at $1.332 on Friday. This decline is the most significant since Donald Trump’s election victory in November 2024. The currency’s downward trajectory has been exacerbated by Burnham’s announcement to run for parliament in the Makerfield constituency, positioning him as a potential challenger to Starmer.
Kathleen Brooks, research director at XTB, commented on the situation, 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 Add to Economic Pressure
In response to the political uncertainty, UK government borrowing costs have surged. The yield on 10-year UK bonds reached 5.18%, the highest since 2008, while the yield on 30-year bonds also spiked to 5.85%. These movements in the bond market reflect growing fears among investors that a Burnham-led government could lead to an increase in public spending and a relaxation of fiscal discipline.
Neil Wilson, an investor strategist at Saxo UK, remarked that the markets are wary of a left-leaning Prime Minister whose fiscal policies could further destabilise the economy. “Ultimately, the bond market is likely to impose fiscal discipline, but it can get messy before that happens,” he said, highlighting concerns over the UK’s fragile fiscal situation.
Burnham’s Popularity and Its Implications
Despite the market concerns, Andy Burnham has maintained a strong public image, being the only major politician in the UK with a net positive approval rating according to YouGov polls. Bill Diviney, head of macro research at ABN Amro, noted that Burnham’s popularity could play a vital role in shaping public perception of Labour’s fiscal policies, particularly if Rachel Reeves remains in her role as Chancellor. “This would signal continuity and a commitment to her fiscal rules that have kept markets relatively stable,” Diviney explained.
However, Burnham must first secure a seat in the House of Commons through a byelection, which could prove challenging. The constituency of Makerfield, where he is set to run, has seen strong support for Reform UK in recent local elections, complicating his path back to Westminster.
Why it Matters
The ongoing political instability within the Labour Party, coupled with rising borrowing costs and inflationary pressures, poses significant risks to the UK economy. The potential for a leadership challenge from Andy Burnham not only threatens the stability of the pound but also raises questions about the future direction of fiscal policy in Britain. As investors remain on high alert, the economic landscape could face increased volatility, making it crucial for both the government and the public to navigate these turbulent waters carefully.
