JPMorgan Chase has reinstated a positive outlook on the British pound as political uncertainty in the United Kingdom begins to fade following the resignation announcement by Prime Minister Keir Starmer.
The US banking giant has long maintained that sterling offers good value for carry trades against other low-yielding currencies, even as the broader market consensus has generally been neutral to bearish.
The pound rose 0.1% to $1.3245, reversing an earlier decline of as much as 0.4%, after Starmer stated he would step down as UK Prime Minister. Markets also reacted positively to the decision by former Health Secretary Wes Streeting to endorse Andy Burnham for the next prime minister rather than contest the leadership himself, further easing recent political concerns.
Global FX strategist James Nelligan noted in a report on Monday that the resignation "adds a degree of clarity to the political situation," allowing the Labour Party to unite behind Burnham as its leader.
Burnham has "softened his rhetoric on fiscal policy, which means carry, UK resilience, valuation, and positioning are more supportive of sterling," Nelligan added.
While JPMorgan had recommended a long position on the pound against the Swedish krona in April, it recently adopted a neutral stance on sterling while awaiting greater political certainty from last week's Makerfield by-election. Nelligan now advises betting on the pound's appreciation against an equally weighted basket of the euro, Swiss franc, and Swedish krona.
Nelligan believes that while some fiscal risk premium may build as the new prime minister's first budget approaches, it is not an immediate concern.
Nelligan stated that the inclusion of former Office for Budget Responsibility chairman Richard Hughes among Burnham's advisors is likely to reinforce the perception that lessons have been learned from the "violent market reaction" triggered by former Prime Minister Liz Truss's unfunded tax-cutting budget in 2022.
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