Pound Drops Amid Political Drama Ahead of Data

The Labour Party leadership drama remains in high gear, depressing the pound ahead of key inflation and jobs data that could determine the course of the BOE's policy.

The Market-Moving Events

• Markets are focusing on drawn-out political drama in the UK amid mounting challenges to the UK premiership.
• UK jobs data are expected to be largely unchanged from a month ago, while inflation is expected to decline as lower household utility prices offset higher fuel costs.
• Likely Starmer replacement Burnham is committed to maintaining current fiscal rules in a bid to calm the markets.

Weaker Pound on Drama, Investors Await Data for Confidence

The pound is starting Monday cautiously after falling to 18-month lows last week as UK Prime Minister Keir Starmer faces mounting leadership challenges. Gilts have sold off amid leadership uncertainty, as markets worry that a new government will end the fiscal rules set by Chancellor Rachel Reeves, which have stabilised markets. The benchmark 10-year gilt breached 5.17%, the highest since the Great Financial Crisis in 2008. Even the BOE has stepped in, with Deputy Governor Sarah Breeden cautioning that political uncertainty is hurting the business environment. However, prospective candidates to take over Labour leadership have tried to reassure markets, with one of the more popular candidates, Andy Burnham, saying he would not change the fiscal rules if he became prime minister. Starmer is facing political challenges from the "right" wing of the party, including Wes Streeting, the former health secretary, and Burnham, from the "soft left". Markets are seeking reassurance that there won't be any major changes to fiscal policy, while the Financial Times reports that uncertainty over the political situation, particularly if it lasts for an extended period, risks delaying investment, which could further weaken the pound and undermine the FTSE 100. 

The political drama might distract markets from the upcoming data, as happened last week. Positive growth figures failed to overcome political uncertainty, leaving the pound weaker. Analysts expected the upcoming data to continue to make the case for the BOE to hold rates unchanged, as a majority of economists still forecast the central bank to stay on hold for the rest of the year. First is Tuesday's jobs data release, with the March unemployment rate expected to remain unchanged at 4.9%, while April's claimant count is expected at 27.3K, very similar to the previous month's 26.8K. Then UK inflation comes out on Wednesday and is expected to ease to 3.0% from 3.3% previously, as a regulated drop in household energy bills offsets higher energy prices. However, this decline is expected to be temporary as higher energy prices filter through in later months. The Core rate is expected to ease to 2.7% from 3.1% prior.

Pound Bounces, But Weak

Cable attempted to stage a recovery on Monday following Burnham's comments, who is getting attention as the most likely candidate to replace Starmer, given his popularity compared to other contenders. That would imply a shift to the left in fiscal policy, with analysts suggesting sterling and UK equities would receive a risk premium. This could last until the end of June; as per Labour Party rules, Burnham would have to be an MP to challenge Starmer, and he will be standing in a special election in Makerfield in June, with the date not yet set. Unless Starmer can secure his position as Labour Party leader before then, keeping the cable under pressure for the coming weeks.

GBPUSD Consolidates in Pennant-Looking Range

Following five sessions of decline, GBPUSD has broken below the lower VWAP but has found support at 1.3300. If the ascent continues, major resistance lies at the middle VWAP near 1.3520, with the swing low at 1.3450 acting as potential short-term resistance. However, the price action this year so far appears to resemble a pennant or triangle pattern, with 1.3250 coming into focus regardless of short-term fluctuations. The question is whether the lower trendline holds or breaks, as the latter would expose lower territories.

Source: SpreadEX | GBPUSD, Daily Chart