Image: Niklas Hallen - Home Office.
The pressure from Labour's powerful left flank is already building against the expected appointment of Mahmood as Chancellor.
Pound sterling surged to new multi-month highs against the euro on the midweek news that Andy Burnham was set to appoint Shabana Mahmood as his Chancellor, meaning the second-most powerful office of state would be occupied by a 'right-leaning' member of the Labour Party.
However, there's already a fight back from the bloc.
"Andy Burnham is facing a revolt from his core support on the Labour left over his plans to appoint Shabana Mahmood over Ed Miliband as chancellor amid claims that she lacks an economic vision and is too divisive for the role," says Steven Swinford, Political Editor at The Times.
Three things to consider for the pound: 1) Burnham might change his mind and appoint Ed Miliband, 2) Mahmood will be swayed by the left of Labour's parliamentary party, 3) she has no experience on the brief and no one knows her views on the economy.
None of these points are particularly bullish for the currency and draw caution on the pound's recent rally; disappointments would feed the overwhelming consensus amongst analysts that it should fall back against the euro by year-end.
Why the Pound Welcomed Mahmood
Burnham is widely expected to confirm Mahmood, the current home secretary, as his chancellor on Monday.
The market likes the appointment because, as home secretary, she has overseen immigration reforms that many on her left are not comfortable with.
The ability to deliver on conviction and not bow to pressure is a prerequisite for any Chancellor of the Exchequer.
For the market, anyone who can deliver some spending consolidation, which would be unpopular with Labour's leftists, would be welcomed.
Above: The pound's had a good run.
The Risks: Burnham Could Yet Change His Mind
Faced with an internal revolt, Andy Burnham could yet choose Ed Miliband as Chancellor.
A senior ally of Burnham told The Times: "Shabana has no sense of the economics. It's just not something she’s ever spoken about. She’s not collaborative. It’s not clear how she would drive the machine."
Swinford cites Rachael Maskell, the first Labour MP to endorse Burnham as Sir Keir Starmer's successor last summer, who said that appointing Mahmood would be "a mistake".
Is Burnham listening? He is likely to take over as Prime Minister on Monday and will immediately begin making appointments. It's at this point that markets will hear whether he has stuck with his conviction.
The above chart from Pantheon Macroeconomics shows that politics is a major factor behind the UK's borrowing costs.
What are Mahmood's Views on the Economy?
We don't know, and that in itself draws question marks over the pound's recent euphoric reaction to the Mahmood appointment.
As Swinford notes, she has never held an economic position in government and has said relatively little about her fiscal views in the past.
"It’s baffling a lot of people because nobody knows what her views are on the economy. Does she even have any? She’s never done a speech or intervention. It’s just absolutely bizarre and I can’t see her as a sensible appointment," one MP told Swinford.
Another MP made the case for Miliband:
"Ed has Treasury experience and he’s been able to bring our party together around some very difficult issues, really advancing the whole climate agenda and winning the argument.
The above chart shows that the next Chancellor must oversee significant consolidation if debt is to start falling again as a % of GDP, something the fiscal rules demand.
"She hasn’t got the level of skill and experience to provide the leadership that is needed in the Treasury. Ed has Treasury experience. That really does matter. Ed shines well above Shabana. It would be a mistake to appoint Shabana."
Even if Mahmood is appointed Chancellor, it's clear the pressure from the left will be immense and that the Shadow of Miliband will loom large.
That means making any reductions to the massive benefits bill will be difficult to achieve, and it's hard to see the UK's public finances consolidate unless this happens.
As a result, the cost of government borrowing will stay elevated and any missteps will be quickly punished, something the next Chancellor will almost certainly find out.
The pound can stay supported if Mahmood is confirmed as Chancellor on Monday, but all these Labour Party dynamics and complications reinforce the view that she will struggle.
That points to medium-term risks for the currency.
"The main risk remains UK politics. While recent positive news has strengthened sterling, sentiment could quickly reverse if Andy Burnham’s initial announcements are perceived as fiscally imprudent," says Constantin Bolz, Strategist at UBS Switzerland AG.
