Sterling slides as Burnham challenge to Starmer spurs market jitters

The pound was headed for its worst weekly performance in 18 months on Friday as traders in the City assessed the likelihood of a leadership challenge by Andy Burnham, the mayor of Greater Manchester, against Prime Minister Keir Starmer later this year.

Sterling fell about three cents, or 2.2%, over the week to $1.332 on Friday, a five-week low. That would mark the largest weekly drop against the U.S. dollar since Donald Trump’s election victory in early November 2024.

The currency declined against the dollar every day this week as political tensions in Westminster escalated, culminating in Burnham’s announcement that he would run for Parliament in the Makerfield constituency in northwest England, paving the way for a potential challenge to Starmer for the premiership.

“The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring,” said Kathleen Brooks, research director at XTB.

“This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect,” Brooks added.

UK government borrowing costs rose amid a broader sell-off in sovereign debt. Yields on U.S. and German government bonds also increased, though the rise in UK yields was more pronounced, as higher oil prices fueled inflation concerns.

The yield on 10-year UK bonds jumped to 5.18%, its highest level since 2008 and above the 18-year high reached on Tuesday when pressure was mounting on Starmer following last week’s local elections.

Thirty-year bond yields also surged, hitting 5.85%, above the 28-year high set earlier this week. That represents a rise of 20 basis points, or 0.20 percentage point.

The sell-off in UK bonds reflected concerns in the City that a Burnham premiership could loosen the UK’s fiscal rules and increase borrowing to fund higher spending.

Investors recalled that in January, Burnham said the UK was “in hock to the bond markets” and trapped in “a low-growth doom-loop.” Burnham has since softened his stance in interviews.

Neil Wilson, an investor strategist at Saxo UK, said markets would not welcome the prospect of the Labour Party anointing a left-leaning prime minister whose fiscal views—and his views of the bond market—were well known.

“Ultimately the bond market is likely to impose fiscal discipline, but it can get messy before that happens. And the UK’s fiscal position gets increasingly fragile every day that the strait of Hormuz is shut,” Wilson added.

Mark Dowding of RBC BlueBay Asset Management told clients that Keir Starmer’s days in 10 Downing Street were “numbered … and against this backdrop UK financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period.”

It would take weeks before Burnham is in a position to challenge Starmer, as he must first win a by-election in an area where Reform UK performed well in the local elections and where the Green Party could also contest the seat.

The sitting MP, Josh Simons, who is standing down to allow Burnham a route back to Westminster, holds a majority of just over 5,000 votes.

Bill Diviney, head of macro research at ABN Amro, predicted that uncertainty and speculation over any changes in fiscal policy are likely to fuel volatility in gilt markets. He added that Burnham was popular with the public.

“Manchester mayor Andy Burnham is by far the most popular among the general public, and in YouGov polling he is actually the only major politician in the UK with a net positive approval rating,” Diviney said. “A factor that would significantly help is if Rachel Reeves keeps her role as chancellor. This would signal continuity and a commitment to her fiscal rules that have kept markets relatively stable.”