Pound outlook: Investors 'too kind' to UK fiscal risks

Matthew Ryan, CFA Ebury

Sterling continues to trade well against other European currencies and, for now, no additional fiscal risk premium is being attached to the pound. This suggests to us two things, firstly markets are relieved at the avoidance of a protracted leadership contest, and secondly that Andy Burnham's professed respect for the UK fiscal rules is being taken seriously.

We believe that investors are being too kind and are not pricing in the pressure from Labour's left to increase spending, whether that comes at the expense of even higher taxation on business or increased gilt issuance.

Although the data calendar is light, this week should provide a key test of this assumption. Focus has turned to Number 11, and the identity of the new chancellor of the exchequer. Initial optimism that centre-left pragmatist Wes Streeting could be set to land the role has faded amid reports that energy secretary and former Labour leader Ed Miliband is now the favoured choice.

We see this as bearish for the pound given his preference for looser fiscal policy, a green industrial agenda and a more interventionist state. Either way, we see little room for further sterling appreciation against the Euro.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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