Cable dipped modestly on Monday after UK Prime Minister Kier Starmer announced he would resign and lead a caretaker government until his successor takes office. Markets had widely expected the move, so the reaction remained limited. If the transition to a new Prime Minister stays orderly and meets expectations, sterling could trend higher through the summer.
Several events could still create uncertainty and weaken the pound in the coming weeks. The muted market reaction suggests traders have largely moved on from the political drama and now focus on key fiscal issues. These include uncertainty over the Chancellor’s future and the impact of any changes on the upcoming Budget.
Why the Market Is Reassured
Kier Starmer announced his plans to step down on the same day former Birmingham Mayor Andy Burnham became the new MP for Makerfield. A special election made that possible and allowed him to challenge Starmer for the Labour Party leadership and the role of Prime Minister. Burnham is widely viewed as the most popular replacement. Many also see him as more left-leaning and better connected to the Party base that has grown disillusioned with the current leader.
At the same time, former Health Secretary Wes Streeting ruled out a bid for Prime Minister. His decision effectively cleared the path for Burnham to run unopposed. That move reduced uncertainty for the markets. Earlier this month, Burnham said he would keep the current fiscal rules in place, which reassured traders. In fact, the pound had already reached its low before those comments and has generally stabilized since then.
Why the Market Might Be Concerned
Over the last two years, Chancellor Rachel Reeves has worked to reassure markets about Britain’s finances. Despite that, investors remain concerned that another round of tax hikes and higher government spending could unsettle bond markets and disrupt the country’s financial system. These concerns have kept gilt yields elevated and weighed on the pound. Any sign that the government may change Reeves’ fiscal rules could trigger significant sterling weakness.
Markets will therefore watch closely to see whether Reeves remains Chancellor. Speculation about her future remains widespread. The choice of a replacement could influence market sentiment. On Monday, reports strongly suggested that Streeting could become the next Chancellor, which helped calm concerns. Other possible candidates include Ed Miliband and Yvette Cooper. Markets generally view them as more likely to alter fiscal rules.
What Comes Next For the Pound?
The first issue for sterling is whether a leadership contest takes place. A contest could weaken the pound by creating fresh uncertainty. If no challenger emerges, markets will focus on Burnham’s economic speech next week. He may provide more details about his fiscal plans and could even announce a new Chancellor.
If no challenger appears, Burnham could take office before July 16 and become the seventh Prime Minister in ten years. Markets would then shift their attention to the new Budget and whether the government has enough fiscal headroom to support its expected policy changes.
