Pound steadies as UK leadership uncertainty keeps focus on Burnham economic plan

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Pound steadies amid leadership doubts

Highlights

Pound last up 0.1% at $1.322, but down 1.7% this month, trading near a seven-month low as dollar strength persists.
Investors await Burnham's Monday speech for fiscal policy signals, with key focus on potential expansionary stance and finance minister choice amid borrowing constraints.
Commodity Futures Trading Commission data shows traders hold a $8.72 billion short position against sterling, the largest since May 2015, reflecting bearish sentiment.

Market focus on speech and fiscal stance

As reported by Reuters, traders are watching Burnham's planned remarks on Monday for clues on fiscal policy after Prime Minister Keir Starmer's resignation shifted attention to the likely next UK leader. Burnham, who returned to Westminster this month after winning a parliamentary seat, is currently the only declared candidate to replace Starmer and could be installed in Downing Street within weeks.

The pound is last up 0.1% at $1.322, but it remains around its weakest level in seven months. Sterling has lost 1.7% this month against the dollar, which has strengthened after an interim peace deal in the Iran war and a reassessment of the U.S. interest-rate outlook lifted the U.S. currency to about a one-year high.

Bond investors are particularly focused on whether Burnham signals a more expansionary fiscal approach to lift UK growth. Analysts say markets are likely to pay close attention to his eventual choice of finance minister, given concerns over the country's limited room for additional borrowing or spending.

Gilt market concerns and broader risk events

Investors do not expect a repeat of former Prime Minister Liz Truss' unfunded tax-cut plan that destabilised the gilt market and forced the Bank of England to intervene, but they remain alert to any sign of looser policy. Caxton strategist David Stritch said the behaviour of gilt yields since the pandemic and continued deficit spending suggest the UK does not need a large new round of giveaways.

He warned that an ambitious but unfunded break from economic orthodoxy previously ended in catastrophe and said Burnham would be wise to avoid the same mistake. Starmer's decision last week to step down, two years after Labour's election victory, drew little immediate market reaction because pressure on him had been building for some time.

Investor caution is also visible in derivatives positioning. Weekly Commodity Futures Trading Commission data shows traders hold a $8.72 billion short position against sterling, the largest since May 2015 and the biggest bearish bet on the pound since June 2015.

Markets are also navigating a heavy global calendar this week, including the monthly U.S. jobs report and a Wednesday speech from new Federal Reserve Chair Kevin Warsh. Warsh is due to join other central bankers at the European Central Bank's annual gathering in Sintra, Portugal.

Our earlier update on the recent slide in UK gilt yields explained that improving global bond-market conditions were giving Andy Burnham a more supportive backdrop as he moved closer to taking over as prime minister. We noted that the rally was driven largely by easing Iran-related risk and lower oil prices, but investors still wanted clear signals on fiscal discipline, cabinet choices and growth policy to avoid a renewed credibility shock.

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