The British pound surged against both the dollar and the euro on Wednesday, reaching its strongest level against the euro since June last year. This rally was driven by expectations that Andy Burnham, poised to become the new Labour party leader and Prime Minister, will select Home Secretary Shabana Mahmood as his finance minister. Mahmood, known for her disciplined approach and trusted by Labour's right wing, is seen by investors as a more fiscally conservative choice compared to Ed Miliband, who had previously been considered a frontrunner and is thought to favor more expansive fiscal policies.
Following these reports, British bonds also rallied, with the key 10-year yield dropping by 2 basis points to 4.958%. This performance outstripped European peers, which saw a decline of around 4 to 6 basis points. Against the euro, the pound climbed 0.3% to 85.05 pence, while against the dollar, it rose 0.4% to $1.3442. This extended gains from the previous day, which were supported by a soft U.S. inflation report.
Analysts noted that the market is relieved that the new Chancellor is unlikely to come from the left of the party. Chris Turner, head of global markets at ING, commented that "relatively high interest rates are keeping sterling supported." Investors are also pricing in a Bank of England rate hike by November, with a second hike anticipated by April 2027. This shift in expectations for rate hikes comes after the latest escalation of hostilities in the Middle East, which is projected to impact inflation through higher oil prices. Other contributing factors to sterling's strength include resilient growth, record inbound takeover activity for British companies, and optimism surrounding closer ties with the European Union ahead of an upcoming summit.
