Sterling has rallied in the past 24hrs following a reduction in UK political risk and as markets increase their BoE interest rate expectations.
Reports that Shabana Mahmood is set to become the next Chancellor of the Exchequer under incoming PM Andy Burnham have been welcomed by markets. She is viewed as a fiscally disciplined and business-friendly Labour politician who is expected to prioritise having a stable economic policy and maintaining investor confidence. Markets had been bracing for a more fiscally expansionary alternative in Ed Miliband, so there’s been quite a relief rally in Sterling and UK government bonds following this news. Furthermore, the Guardian has also reported that Andy Burnham is playing down the prospect of a wealth tax for now.
This morning’s UK GDP figures came in as expected at 0.1%, which was a return to positive territory after a 0.1% contraction the previous month. With UK inflation continuing to run high, and impacts of the Iran war continuing to take hold, markets are now fully pricing in a BoE interest rate hike by the November policy meeting and a second hike pencilled in by April 2027. This shift in expectations has made the Pound more attractive to investors seeking higher yields.
In other news, the USD has been on the back foot after Tuesday’s US inflation data missed expectations. Headline inflation (CPI) fell to 3.5% year-on-year, which is down sharply from 4.2% in May and well below the 3.8% forecast. On a monthly basis, prices fell 0.4% versus an expected 0.1% drop, which was the largest single-month drop since April 2020. This is mainly being put down to the fall in oil prices in June following the announcement of the Iran ceasefire. This data, coupled with the recent weak US job figures, has dramatically pushed back the Federal Reserve rate hike expectations and thereby reduced the appeal of the USD.
As a result, the GBP/USD has climbed around 2-cents from Tuesday’s low and touched a 2-mth high earlier. The GBP/EUR jumped nearly 1% higher yesterday and to a 13-mth high. The EUR/USD has risen nearly a cent since Tuesday’s US inflation data and trades towards the higher end of the past month.
With Westminster heading into summer recess, political scrutiny of the new government will ease temporarily. However, the conversation will inevitably turn to the Autumn Budget and what tax and spending decisions Burnham's team will make. That is likely to be the next real test for the pound. For now, though, the tailwinds are firmly in place.
