Commerzbank‘s Thu Lan Nguyen notes that the Pound initially strengthened as markets welcomed Andy Burnham’s rapid move into 10 Downing Street and hopes for reduced political turmoil. She cautions that the UK faces stagnating growth, high debt and rising costs, and that current positive sentiment toward the Pound could reverse if economic revival and fiscal consolidation disappoint.
Political shift supports Pound for now
“Today, Andy Burnham will officially move into 10 Downing Street in London, completing a surprisingly smooth transfer of power from his predecessor, who resigned only last month. Markets initially rewarded this rapid change in leadership with an appreciation of the pound.”
“On the other hand, the market appears to be betting that the period of political turmoil and recurring scandals that has characterised recent years is coming to an end. Whether Burnham can in fact provide greater stability remains to be seen.”
“In short: Burnham needs to revive the economy while at the same time consolidating the public finances. In doing so, he is dependent on the confidence of financial markets.”
“If he fails to achieve either of these goals, the currently positive sentiment could quickly reverse. In the short term, however, markets are likely to grant Burnham the benefit of the doubt.”
“The Burnham euphoria could therefore well continue for some time. However, there is a substantial risk that, as his term in office progresses, political and economic realities will move more into focus – and the initial euphoria will give way to a certain sobriety.”