The pound fell to a two-month low on Monday amid speculation that Prime Minister Keir Starmer is on the verge of announcing his departure from Number 10. Shares in London initially opened lower but recovered in what analysts described as a muted reaction, given that the prospect of the PM’s possible exit had largely been priced in by investors.
Reports suggest Sir Keir could soon set out a timetable for his resignation, potentially paving the way for Greater Manchester Mayor Andy Burnham to become Britain’s seventh leader since the Brexit vote a decade ago. Sterling slipped as much as 0.4% overnight against the US dollar to $1.32 and also dropped against the euro.
Bond Market Focus Amid High Borrowing Costs
The main focus for investors remains the bond market, given the UK’s already punishingly high borrowing costs and the scale of national debt. The yield on 10-year gilts was broadly flat at 4.83%, not far off their highest level since the 2008 financial crisis, while on 30-year gilts it actually fell in early trading on Monday to 4.52%.
Chris Beauchamp, chief market analyst at online trading platform IG, said: “It has been coming for months, but today might finally see Starmer give up the ghost on his less than stellar premiership. For markets, the question is what will really change. Does Burnham, who already has form on flip-flopping, have the strength of will to chart a more dynamic course than the drift exhibited by Starmer’s period in office? Something big is needed to arrest the slide towards Reform, but markets are not likely to be happy with some kind of free-spending approach given the UK’s dire financial state.”
Analysts Highlight Political Instability
Jim Reid, analyst at Deutsche Bank, noted that the PM’s possible resignation was occurring on the eve of the 10-year anniversary of the Brexit vote, “something the UK still hasn’t come to terms with. Since then, the UK has revolved through six Prime Ministers which, alongside Brexit, underlines the immense difficulties many incumbents have in the Western World today. Everyone arrives in the post with great hopes but then the lack of growth and financial realities hit. Until you have stronger economic growth and less constrained by debt it’s likely the conveyor belt of PMs will continue.”
The stock market reaction was relatively benign, with the FTSE 100 up more than 4% since the start of the year and 17% higher year-on-year.
Fiscal Policy Concerns Under Burnham
Nomura economist George Buckley highlighted the key questions for markets: “The most important question relates to Mr Burnham’s approach to fiscal policy, his pick of Chancellor and whether he will stick to the fiscal rules.” Investors are watching closely for any signs of a shift toward higher spending, which could unsettle bond markets given the UK’s stretched public finances.
