Sterling slips, borrowing costs edge up
Sterling was down 0.2% at $1.319, near its lowest in three months
Sterling slipped and UK borrowing costs edged up on Monday, after Prime Minister Keir Starmer said he would resign and a new leader to be in place by September, leaving investors with no clarity on how Britain’s next leader might run the economy.
Sterling, which has shed some 3% since pressure on Starmer began to heat up in February, was down 0.2% at $1.319, near its lowest in three months.
Britain already has the highest borrowing costs in what are known as the G7 or Group of Seven countries due to its high debt and interest payments, years of anaemic economic growth, its struggles to cut spending and the need to invest in areas like defence.
At the moment, Andy Burnham is the favourite and he’s tried to reassure the gilt market that he will stick to the fiscal rules, and there are reports that he’s working with respected economists, said MUFG senior currency analyst Lee Hardman.
That has definitely provided some reassurance to investors and will limit the downside risks for the pound and gilts in the near term, he said.
The options market shows traders are willing to pay more to hedge against volatility in sterling in the coming weeks than they were on Friday.
UK 10-year gilt yields are at around 4.85%, not far from their highest since the 2008 financial crisis, meaning Britain must pay more for its medium-term borrowing needs than any other “developed” nation.
The question is, is it going to be a coronation or a contest? If it’s a coronation, then I think we can see a little bit of a rally in gilts and/or sterling holding on, CIBC head of G10 currency strategy Jeremy Stretch said of Starmer’s potential successor.
Stretch said: But if there’s a contest, then the danger would be that could involve various protagonists involving themselves, or being dragged into fiscal commitments that they would not otherwise have made, or not be comfortable with. So that would be much more problematic from a sterling perspective.