Above: File image of Andy Burnham. Copyright by World Economic Forum / Faruk Pinjo. Licensing and source.
Burnham could struggle to beat Reform in Makerfield; the pound's selloff should be contained.
Pound sterling dropped sharply in late Thursday trade after Manchester Mayor Andy Burnham confirmed he would stand for election to the UK Parliament as the first necessary step to replace Keir Starmer as Prime Minister.
The incumbent MP of the Makerfield constituency said late in the day that he would step down from his position in order to trigger a by-election. Burnham soon confirmed he would indeed contest the seat on behalf of Labour, if allowed by the Party.
The pound promptly dropped on the news as markets moved to price in the prospect of a Burnham premiership becoming increasingly real:
The pound to euro exchange rate dropped half a per cent on Thursday and extends the loss to 1.1465 on Friday. The pound to dollar rate felln0.86% lower on Thursday and adds another 0.40% decline on Friday as it hits 1.3347. Sterling has also lost ground against all G10 and major EM peers.
Nigel Green, CEO of deVere Group, says Andy Burnham represents the biggest threat to markets among the serious Labour contenders because "investors will immediately associate his leadership ambitions with heavier state spending, looser fiscal discipline and a greater willingness to test market tolerance on borrowing."
Keir Starmer warned last year Burnham's economic plans were akin to those of Liz Truss, who in 2022 famously collapsed the pound.
"The bond market remains traumatised by the Liz Truss mini-budget crisis," says Green. "Everyone still remembers how quickly Britain lost credibility once investors believed fiscal discipline had broken down."
Above: GBP/EUR drops to the 1.1465 pivot.
The pound started Thursday on a resilient tone as the odds of Prime Minister Keir Starmer being replaced by Burnham saw odds just below 30% on Polymarket.
Those odds have since surged to 50%.
The reason the odds aren't any higher is that Makerfield is now considered a Reform stronghold; the current Nowcast Model, based on current polling, shows Reform would win 45.3% of the vote in Makerfield.
Image courtesy of Election Maps UK.
Burnham clearly estimates he has what it takes to sweep aside Reform, signalling to the Labour Party he can win them the next election.
This looks hubristic.
The pound has rightly moved to price in increased political and fiscal risk this Thursday, but it will find a floor as it becomes clear Burnham faces a significant battle.
However, Michael Pfister, FX Analyst at Commerzbank, says this Friday that the pound is vulnerable to further losses.
"Despite the recent weakness of the pound, we believe that this has not yet been fully reflected in market prices. We therefore continue to expect higher EUR-GBP levels in the coming weeks," he says.
Pfister explains political uncertainty rarely benefits a currency, "it is currently unclear what policies the potential successors intend to implement."