LONDON: The pound eased on Monday as speculation mounted that Prime Minister Keir Starmer could set out a timetable for his departure imminently, paving the way for rival MP Andy Burnham to become Britain's seventh leader since the Brexit vote a decade ago.
Sterling GBP=, which has lost some 3% since pressure on Starmer began to heat up in February, was down 0.3% at US$1.319, near its lowest in three months.
Britain already has the highest borrowing costs in the Group of Seven wealthy nations due to its high debt and interest payments, years of anaemic economic growth, its struggles to cut spending and the need to invest in areas like defence.
The threat to Starmer, whose popularity among voters has nose-dived over his handling of the economy, ramped up on Friday when Burnham, the former Greater Manchester mayor, decisively won a parliamentary election to return to Westminster.
The options market shows traders are willing to pay more to hedge against volatility in the pound in the coming weeks than they were on Friday GBPSO=, GBP1MO=.
Key for investors is the UK gilt market, where yields at around 4.85% GB10YT=RR are not far off their highest since the 2008 financial crisis, meaning Britain must pay more for its medium-term borrowing needs than any other developed nation.
"The question is, is it going to be a coronation or a contest? If it's a coronation, then I think we can see a little bit of a rally in gilts and/or sterling holding on," CIBC head of G10 currency strategy Jeremy Stretch said of Starmer's potential successor.
"But if there's a contest, then the danger would be that could involve various protagonists involving themselves, or being dragged into fiscal commitments that they would not otherwise have made, or not be comfortable with. So that would be much more problematic from a sterling perspective."
Repeated political crises and concern over Britain's stretched finances have made investors wary of the pound and of gilts, which are prone to far higher volatility than many other government bonds.
Burnham is viewed as being more left-leaning than Starmer, and although he has said he will stick to incumbent finance minister Rachel Reeves' tight fiscal rules, investors will need to see proof.
"Burnham has said that he would respect fiscal rules. However, it is not obvious where the money for any additional spending will come from," Jefferies strategist Mohit Kumar said.
"Taxes have reached a stage where further rise(s)... would be counterproductive. Efficiency savings look good on paper, but never realistically work."
"We have stayed away from the long end of the gilts curve, have steepeners in our portfolio and have been underweight sterling," he said, referring to a position that assumes shorter-dated bonds will perform better than longer-dated ones, given the concern about Britain's long-term finances.
"We are maintaining our view and expect further volatility in the UK long end over the coming days."
