The pound sterling is heading for its steepest weekly decline in 18 months as financial markets react to the possibility that Manchester Mayor Andy Burnham may challenge Prime Minister Keir Starmer for the Labour leadership later this year. Sterling dropped nearly three cents, or 2%, over the week to $1.336 on Friday, marking a five-week low and the largest weekly drop against the US dollar since Donald Trump's election victory in early November 2024.
The currency fell daily amid intensifying leadership tensions at Westminster, culminating in Burnham's announcement that he will run for parliament in the Makerfield constituency, setting the stage for a potential challenge to Starmer. Kathleen Brooks, research director at XTB, noted that the pound weakened sharply after Burnham entered the fray, describing him as the least market-friendly candidate compared to others like Wes Streeting, whose resignation did not trigger a similar negative reaction.
Bond Yields Surge Amid Political Uncertainty
UK government borrowing costs jumped sharply as part of a broader sell-off in sovereign debt. Yields on US and German government bonds also rose, but the UK experienced a more pronounced increase amid rising oil prices fueling inflation concerns. The yield on 10-year UK bonds climbed to nearly 5.17%, the highest since 2008 and above the 18-year peak set on Tuesday when pressure mounted on Starmer following last week's local elections. Thirty-year bond yields hit 5.84%, surpassing the 28-year high reached earlier in the week, representing a rise of 19 basis points.
The bond sell-off reflects City fears that a Burnham premiership could loosen fiscal rules and increase borrowing to fund higher spending. Investors recall Burnham's January statement that the UK was "in hock to the bond markets" and trapped in a "low-growth doom-loop," though he has since softened his stance in interviews. Neil Wilson, an investor strategist at Saxo UK, warned that markets would dislike the prospect of a left-leaning Labour prime minister with well-known fiscal views. He added that while the bond market may ultimately impose fiscal discipline, the process could be messy, especially with the UK's fiscal position becoming increasingly fragile amid the Strait of Hormuz closure.
Market Analysts Warn of Extended Political Risk Premium
Mark Dowding of RBC BlueBay Asset Management told clients that Starmer's days in Downing Street are "numbered," and UK financial assets and sterling are likely to face an elevated political risk premium for an extended period. However, Burnham's path to a leadership challenge is not immediate; he must first win a by-election in Makerfield, where Reform UK performed well in local elections and the Green Party may also contest. The sitting MP, Josh Simons, who is stepping aside to allow Burnham's return to Westminster, holds a majority of just over 5,000 votes.
Bill Diviney, head of macro research at ABN Amro, predicts that uncertainty and speculation over fiscal policy changes will fuel volatility in gilt markets. He noted Burnham's popularity with the public, citing YouGov polling that shows the Manchester mayor is the only major UK politician with a net positive approval rating. Diviney added that retaining Rachel Reeves as chancellor would significantly help, signaling continuity and commitment to her fiscal rules, which have kept markets relatively stable.
