MUFG: The GBP - FJElite

The pound is continuing to trade at close to recent lows against the US dollar at just above the 1.3200-level. On the other hand, the pound has remained more stable against the euro with EUR/GBP trading towards the bottom of the recent trading range between 0.8600 and 0.8700 where it has been for most of this year. The relative stability of the pound against the euro highlights that UK political risks have not yet significantly continued to a weaker pound this month. The move lower in cable has been driven more by the stronger US dollar leg.

Andy Burnham who is the next Prime Minister in waiting is set to make a keynote speech today laying out some of his views on economic and fiscal policy. It has been reported over the weekend that he will pledge the biggest devolution of powers in modern times to help "lift Britain back up" by handing more decision-making powers to local authorities, overhauling public procurement to boost British jobs and talking youth unemployment. It includes plans for more work placements and apprenticeships. He hopes to boost regional growth by giving local decision makers more power. He also reportedly wants to create a “No. 10 North’ to drive devolution and 10-year mission to raise living standards through industrialization, housing, infrastructure and reform of essential utilities.

So far market participants have not been unnerved by potential policy changes under his leadership. The 30-year gilt yield has fallen by around 40bps from last month’s high at 5.86% driven mainly by the paring back of inflation expectations and BoE rate hike expectations. Andy Bumahm’s pledge to stick to the government’s current fiscal rules curtailing room to loosen fiscal polices have also played a role. We are not expecting today’s speech from Andy Burham to change recent price action in the gilt market which limit spillovers. Market participants are waiting eagerly to see who Andy Burham will choose to be the chancellor after he is confirmed as the next Prime Minister.