Still of Burnham being installed in Parliament.
Pound-to-euro rises back to 1.16 resistance, making a breakthrough possible.
The British pound rallied half a per cent on the day Keir Starmer stood down as Prime Minister and it became clear Andy Burnham would replace him without a challenge, meaning a messy and prolonged leadership contest will be avoided.
Former Health Secretary Wes Streeting, seen as the only credible candidate to challenge Burnham, was quick to back Burnham for the role.
Following Starmer's resignation, we warned that the pound would be handicapped by a summer of uncertainty; however, a good deal of that uncertainty will be removed by a speedy transition, and the pound likes that.
The pound's relief is therefore a reaction to 'least-bad' developments over recent hours: a leadership battle would have required Burnham to lay out left-leaning policies to impress the parliamentary Labour Party, and that could have scared the market.
"Burnham’s team do not expect a leadership contest, reducing the risk of prolonged political uncertainty," says Samara Hammoud, analyst at Commonwealth Bank.
Above: GBPEUR rises to the 1.16 resistance line. A pullback in the coming hours becomes possible while resistance is intact.
Without a leadership challenge, Burnham governs with a clean slate and no predetermined red lines and promises that bind him to the left-wing caucus, ensuring a commitment to respecting the UK's fiscal rules is made all the easier.
Those fiscal rules are mentioned in Tuesday's issue of the Times, which reports Burnham will next week deliver a speech promising to, "protect the economy and stick to fiscal rules."
That speech now becomes the key risk even in pound sterling's near-term calendar and its contents could well determine the shape of the pound's summer.
Declining Risk Premium
He is apparently being advised by former Bank of England Chief Economist Andy Haldane and Jim O’Neill, former Chief Economist at Goldman Sachs.
For investors, these developments offer reassurance, and this has allowed the pound to shake some risk premium.
The pound-to-euro exchange rate remains the best gauge of UK-specific sentiment, and Tuesday's half-percent advance underpins a steady uptrend that has been in place since November.
With GBP/EUR finding buying interest in the mid-1.15s and dips becoming increasingly shallow, the odds of a break through the mighty 1.16 barrier become increasingly likely.
A short-term Burnham bounce could be underway.
Above: The spread between the UK and German two-year bond yield has risen again, meaning UK borrowing costs have risen faster than those of Germany. Could that be behind the GBP/EUR bounce?
But these are still early days, and Burnham will eventually have to spell out his policies and try to square how he intends to boost spending for his pet projects while not increasing borrowing or cutting spending elsewhere.
There is a risk that Burnham tries to change the rules of the game by altering the fiscal rules. "The market reaction to a potential Burnham premiership will depend heavily on if or when any fiscal changes are announced, how they are presented, and who he appoints as chancellor," says Hammoud.
O'Neill has been on record as saying the government has scope to alter the current set of fiscal rules that ensure debt must fall as a percentage of GDP on a medium-term horizon.
"A commitment to the existing fiscal rules doesn’t entirely rule out the risk of a more activist strategy with upside risks for the government’s funding requirement," says Sam Hill, Head of Market Insights at Lloyds Bank.
If the market sees any changes to the rules as an excuse to increase borrowing, the cost of servicing the country's debt on global bond markets would rise.
That could bolster the pound if the rise is contained, as the pound tends to track bond yields higher. However, if the move is disorderly and markets are truly spooked, the pound could head in the opposite direction.
The Milliband vs. Streeting Tension
The appointment of his Chancellor will be a major moment as it will give an insight into where his economic politics leans. The Guardian reports Burnham is considering appointing Ed Miliband as chancellor "in order to challenge Treasury orthodoxy".
Milliband, who doggedly pursues the UK's net-zero agenda, is seen as being the least market-friendly pick of the bunch, and that could worry markets as the odds of supply-side reforms in the energy market would be close to nil.
However, analysts at ING say the prospect of Wes Streeting becoming the next Chancellor was behind the currency's Monday bounce.
"The pound had a decent run yesterday after former health secretary Wes Streeting – a centrist figure within Labour – announced he would back and not challenge Burnham’s PM bid," says ING's Francesco Pesole. "Streeting is generally considered a more market-friendly pick than Ed Miliband."
Looking ahead, ING forecasts a further modest lift for sterling if Streeting is confirmed as chancellor, "but risks from here look skewed to the downside."
"Markets appear optimistic about the transition, yet history shows that even limited budget concerns can trigger disproportionate moves in gilts and GBP," warns Pesole.