The political drama in the UK continues to outweigh the data, even as the British Pound attempts a recovery. However, as the political uncertainty drags on, key data points could have a larger influence on the market as traders catch up. Additionally, the circumstances make the pound particularly vulnerable if the data is missing.
Cable had the worst performance in 18 months last week as traders raised the odds that Kier Starmer will no longer be Prime Minister soon. A key rival, Andy Burnham, was cleared to run in a special local election that would allow him to contest the leadership of the Labour Party. However, this prospect caused gilts to rise to levels not seen since 2008, as investors worried that a new government would upset the country’s delicate financial balance.
What’s Driving the Pound
The pound is weaker as traders count up to three potential rivals for Starmer, who are boxing him in politically. Former Health Secretary Wes Streeting is seen as challenging from the right wing of the Labour Party, while Burnham and Angela Rayner are seen as further to the left. The party base has largely been frustrated with what they see as Starmer’s lack of commitment to more left-wing policies.
The market is worried that if a more left-leaning option were to win, it could do away with Chancellor Rachel Reeves’ fiscal rules, which have helped calm markets and support the British Pound over the last couple of years. Left-leaning challengers to Starmer have called for increased spending, upsetting the bond market. Such a move would imply either more debt, which would raise inflation, or more taxes, which would slow the economy. Or, potentially, both. Any of those scenarios is widely seen as negative for the pound.
A Bump in Cable, But Weakness Remains
The pound bumped a little bit on Monday after Burnham promised to respect Reeves’ rules in a bid to calm markets. However, pressure remains to the downside even as Starmer holds on to power, as markets price in the risk of uncertainty.
The issue for cable is that the uncertainty could continue for quite some time. Burnham will stand for a special election to become MP sometime in the middle or late June. That is a condition for becoming Prime Minister. Unless Starmer can shore up his support and definitively end speculation of his ouster, then the uncertainty will likely last until the end of next month. And candidates could sound much more left-leaning and scarier to markets in an attempt to woo the Labour base seeking a leftward turn.
What the Market is Looking For
Meanwhile, this week sees two major data points that otherwise might move the British Pound. The first is on Tuesday, with jobs data. UK unemployment is expected to remain unchanged at 4.9% in March. At the same time, the April claimant county is also seen around the same at 27.3K, compared to 26.3K a month earlier. Note that with the claimant count, the higher the number, the worse it is for the pound.
Then on Wednesday is the release of UK CPI, which is expected to drop to 3.0% from 3.3% prior. However, this is due to a technical change in UK utility bills and is offsetting a rise in energy costs. The Core rate is likewise anticipated to drop to 2.7% from 3.1% previously. If the data is matched, it will likely keep the market expecting the BOE to hold rates unchanged for now.
