With UK Prime Minister Keir Starmer announcing his resignation and the Labour Party swiftly rallying around the favored successor Andy Burnham, sentiment on Wall Street towards sterling assets has turned optimistic. JPMorgan believes UK political risks are diminishing and has reinstated a bullish outlook on the pound.
During early European trading on the 22nd, Starmer declared he would step down as Prime Minister. With former Health Secretary Wes Streeting explicitly offering support and former Greater Manchester Mayor Andy Burnham vying for the party leadership, markets quickly interpreted these moves as a sign of internal consolidation within Labour, accelerating a sterling rebound.
During the European session, the pound recovered from an intraday loss of up to 0.4% against the US dollar to trade in positive territory. It even broke above 1.3270 to reach a new daily high, moving away from the lows seen since late March, which were hit after falling below 1.3170 last Friday.
James Nelligan, a global foreign exchange strategist at JPMorgan, stated that Starmer's resignation has brought "a bit more clarity" to the UK political situation. He noted that the Labour Party now has an opportunity to unite around Burnham, thereby reducing the political uncertainty that had previously troubled markets. Based on this development, JPMorgan has shifted back to a bullish stance on sterling and recommends going long on the pound against an equally weighted basket of the euro, Swiss franc, and Swedish krona.
JPMorgan's View: Political Fog Lifts, Sterling Regains Appeal
In his latest report, Nelligan pointed out that Starmer's resignation "adds a bit more clarity to the political situation," enabling Labour to coalesce around Burnham as its leader.
He believes Burnham has "toned down his rhetoric on fiscal policy, which means that carry, UK resilience, valuation and positioning are more supportive of sterling."
In other words, Starmer stepping aside for Burnham, and Burnham moderating his previously more radical fiscal proposals, suggests the market's focus will shift back to UK economic fundamentals and interest rate differential advantages, rather than political risk.
In April, JPMorgan had recommended going long on sterling against the Swedish krona but recently adopted a neutral stance while awaiting by-election results. The bank has now reinstated its long position and advises investors to bet on the pound's appreciation against the equally weighted basket of the euro, Swiss franc, and Swedish krona.
However, JPMorgan also cautioned that as the new government drafts its first budget in the future, a fiscal risk premium could reaccumulate, though this is not expected to be a dominant factor in the near term.
Burnham Emerges as Frontrunner, Wall Street Sees Him as More Market-Friendly Than Expected
Andy Burnham, 56, solidified his position within the Labour Party by winning a by-election in the House of Commons last week with 54.8% of the vote, defeating UK Reform Party candidate Robert Kenyon. With Wes Streeting withdrawing from the leadership race and publicly endorsing him, Burnham has become the clear frontrunner to succeed Starmer as party leader and Prime Minister.
In recent years, some investors had worried that Burnham's left-leaning tendencies might lead to fiscal expansion and increased regulation. However, he has recently emphasized fiscal discipline on multiple occasions and attempted to send signals of stability to the business community.
Several Wall Street institutions believe Burnham is, in fact, adopting a more pragmatic approach than previously feared by the market.
Analysts at Goldman Sachs previously noted that if the Labour Party manages a smooth internal power transition and avoids prolonged infighting, the political discount on UK assets could decrease. Barclays also believes that if Burnham forms a government, he is likely to maintain the independence of the Bank of England and the existing fiscal rules framework, avoiding any radical policy shifts.
Market Focus Shifts to New Budget, Near-Term Outlook Positive for Risk Assets
Analysts suggest that the primary concern for UK markets currently is not the change in leadership, but whether the future budget might widen the fiscal deficit.
If a Burnham government continues to adhere to fiscal discipline while promoting infrastructure investment and regional economic revitalization plans, UK equities, government bonds, and the pound could all benefit.
JPMorgan believes the UK economy still shows resilience, and the Bank of England's relatively high interest rates provide sterling with attractive carry value among G10 currencies. The reduction in political uncertainty will allow investors to refocus on this advantage.
Regarding future risks, the market will closely watch the formation of the new government's cabinet and its first fiscal budget. Nelligan stated that the fiscal risk premium may eventually rise again, but in the short term, the increased political clarity means sterling should regain support.
Judging by the market reaction, investors appear more inclined to view Starmer's departure as the end of an uncertain period rather than the start of a new wave of risks.
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