Pound Sterling Leaps on Burnham Chancellor Pick

File image of Ed Miliband. Picture by Dan Dennison / DESNZ, copyright: Gov.uk.

Reports say Burnham has selected Mahmood as Chancellor.

The British pound has risen right across the board in late Wednesday trade, with the trigger being reports concerning Andy Burnham's choices for his senior team.

It is reported that current Home Secretary Shabana Mahmood is now expected to become Chancellor of the Exchequer.

That is a relief to markets who were prepared for left-winger Ed Miliband to become the UK's most senior finance minister, which would have raised concerns about the UK's debt and spending trajectory.

According to the iPaper, Miliband's prospects of becoming Chancellor "had suffered not so much because of scepticism about his net zero agenda, but because many in the party had not forgiven him for Labour's 2015 general election defeat."
The relief in the pound was palpable with the currency surging higher across the board:

The development is particularly noticeable in the pound-to-euro pairing which surged to the cusp of 1.18 by late Wednesday trade.

Elsewhere, the pound-to-dollar pairing rose to 1.3485 and the pound-to-Australian dollar rose to 1.9266.

"GBP is particularly interesting as demand is relentless and the worst case for Chancellor (Miliband) is already priced in. If Burnham were to select someone more market friendly early next week, GBP could rip even more," said Brent Donnelly, strategist at Spectra Markets in a Tuesday note.

He was right, however, the news landed a lot sooner than expected.

Picture by Andy Taylor / Home Office

The currency market's relief at the rumours suggests there was a lingering premium weighing on the pound over the pick for Chancellor.

The concern was that Miliband would oversee a more generous spending programme if chosen to head up the Treasury.

Mahmood is meanwhile considered an outright centrist, which was proven by her relatively hard line on immigration while at the Home Office.

Markets are betting that she is more likely to hold the line against the more left-leaning elements of Labour's parliamentary body. Last year, the pound and bonds fell when Prime Minister Keir Starmer and Chancellor Rachel Reeves were unable to stand up to Labour Party colleagues when trying to get a mere £5BN in benefit cuts across the line.

The episode proved a timely reminder that the pound remains highly sensitive to Britain's political discourse.

Caution for the GBP Bulls: Taxes Set to Rise

There's more Burnham news to consider, and this leans against the pound.

In an interview with a prominent football pundit, Burnham refused to rule out raising taxes.

He said that people may have to pay "a little bit more" in tax because of the state of the public finances.

This sets up a tax-raising Autumn budget, and the risk for the UK economy and British assets like the pound is that there's a freeze in activity in the run-up to that budget.

We saw it ahead of both of Rachel Reeves' tax-hiking budgets.

Indeed, the pound-euro fell to a low of 1.13 ahead of last year's event as months of speculation and frozen investment plans took their toll.

"Closer to the Autumn budget we expect fiscal risk premium to build," says Meera Chandan, FX strategist at JP Morgan in a recent GBP overview note that touches on current political developments.

JP Morgan holds a near-term GBP/EUR forecast target of 1.1235 on "fiscal risks being more fully priced in."