File image of Angela Rayner. Source and license: Ministry of Housing, Communities & Local Government
Pound sterling is under-pricing political uncertainty, say analysts, as Prime Minister Keir Starmer faces mounting pressure.
It's reported Thursday that Angela Rayner, the former Deputy Prime Minister, is weighing up mounting a direct challenge to Sir Keir Starmer’s leadership after next week’s local elections.
The Times says her supporters are compelling her to openly call for the prime minister to quit. The newspaper says she is considering making a public intervention after the results of the local and regional elections are made known next Friday.
"The current concern for markets is who would replace the Prime Minister if he were to go. Angela Rayner and Ed Miliband are amongst the bookies’ favourites - but a lurch to the left wouldn’t go down well with bond markets," says Marc Cogliatti, Head Markets Risk Strategies at Validus Risk Management.
"In this scenario, we would likely see further downside pressure on sterling," he adds.
Analysts maintain that the prospect of a leftward lurch in British politics is one reason why the pound will continue to struggle against the euro in the coming weeks and months.
For now, markets are relatively sanguine: the pound-euro exchange rate rises to 1.1540, having been as low as 1.1440 at the start of the month.
Polymarket pricing shows betting markets see a 67% chance that Starmer is gone by the end of the year and only a 42% chance that he's out by June.
The risk is that the financial market is underpricing the prospect of a challenge on Starmer. "The risk of a leadership change in Downing Street is growing. Markets are wary that a new prime minister – and, by extension, chancellor – might mean more borrowing and looser fiscal rules," says James Smith, Developed Markets Economist at ING Bank.
Rayner is not the only name in the hat: the current mayor of Manchester, Andy Burnham, is on the market radar with his latest intervention.
"Politics remains the other central theme for sterling," says Francesco Pesole, FX Strategist at ING Bank. "Yesterday, comments by Labour Manchester mayor Andy Burnham hit both the gilt market and GBP."
Burnham is seen as a potential replacement for Starmer, "and widely considered a fiscal dove," explains Pesole.
Burnham gave a clear indication that he would loosen the importance of the fiscal rules aimed at preventing governments from borrowing more to increase spending and potentially upsetting bond markets.
"There's certainly a case, when we look at the pressure on defence spending, to consider that exceptionally outside of the rules," he told Bloomberg.
Burnham also declined to back Starmer staying in post after next week's elections.
And even if Starmer soldiers on, there's the additional risk he shifts policy leftwards to placate left-leaning members of his own party and introduces policies that further undermine the country's finances. With bond markets under strain and the cost of borrowing at, or near, multi-year highs, it's a febrile backdrop.
We reported on Thursday that there's growing speculation that Starmer might soon demote Rachel Reeves from her position as Chancellor of the Exchequer in an effort to regain the initiative.
At Wednesday's Prime Minister's Questions in Parliament, Starmer was prompted by the Leader of the Opposition, Kemi Badenoch, "to reshuffle the Chancellor", Starmer failed to confirm he wouldn't do so.
"I didn’t hear him say he’s not reshuffling the Chancellor. It sounds like she’s toast," said Badenoch in response to the Prime Minister's answer.
Reeves is seen as a least-worst option by markets who fear her replacement would break with the fiscal rules that are designed to maintain spending discipline.
A reshuffle of ministers is mooted for after the May 07 local elections to allow Starmer to try and reset the political agenda.
However, given his diminished political capital following the Mandelson scandal, a reshuffle would look like Starmer's merely 'rearranging the deck chairs on the Titanic.'
"We do not expect major retracements in fiscal risk premium anytime soon and therefore stay long EURGBP as the risk of a change in leadership and fiscal policy may persist until after the May local elections," says BNP Paribas. "While a lot of bearishness is already in the price, UK assets are still at risk of underperforming further until clarity on new policies is unveiled at the Autumn budget."