File image of Andy Burnham. Copyright by World Economic Forum / Faruk Pinjo.
The British Pound is not fully reflecting the risks attached to Andy Burnham's imminent arrival in Downing Street, according to a new assessment from Ebury.
"All things considered, the Burnham premiership premium appears somewhat underpriced to us," says Matthew Ryan, Head of Market Strategy at the global financial services firm and FX specialist.
Sterling has held up well since Keir Starmer's resignation, a reaction that caught the firm by surprise. In fact, the currency is the second-best performing G10 currency when screened over the past month, and fourth-best over this year as a whole.
Analysis attributes that performance to the UK's still-elevated relative yield advantage, strong M&A inflows and some faded risk premium related to politics.
As has often been the case since the Brexit referendum, politics tends to command a great deal of market attention when considering the pound.
"What we didn't anticipate is that Starmer's resignation, and the inevitable coronation of the now former Greater Manchester mayor Andy Burnham later this month, would be taken so well by financial markets," says Ryan.
Fiscal Rules Are the Fault Line
Ryan attributes the market's composure in part to Burnham's insistence that he will stick to the "seemingly sacred" fiscal rules, though whether he does or not remains to be seen.
"If Burnham is a man of his word, then sterling may well be fine," says Ryan.
"Yet rhetoric and reality have a habit of diverging once spending demands are laid bare, and any indication that these rules are being either abandoned or bent, even at the margins, risks a disorderly sell off in UK assets."
The Chancellor Question
Investors should have more to go on once Burnham's uncontested coronation is confirmed around 17 July.
A key question, says Ryan, is who he appoints as the next chancellor now that Rachel Reeves appears "destined for the exit door."
Energy Secretary Ed Miliband is the bookies' favourite for the role.
"We see this as another clear negative for the pound given his preference for expansionary fiscal policy – in particular, ramped-up spending on the green transition," says Ryan.
No Help Coming from the Bank of England
Ebury doubts UK interest rates will ride to the currency's rescue either.
"Clear slack evident in Britain's jobs market means that we do not think that second-round inflation effects will materialise to the extent that would warrant tightening in the UK," says Ryan.
Clarity should not be long in coming.
"At any rate, all of the 'Big Three' central banks will be meeting in July, so we won't have to wait long to get their latest take on things," he adds.
