Sterling Dips, but Poised for Weekly Rise as Burnham Prepares for Power Shift
Market Movements and Political Developments Impacting Sterling
Recent Performance of the Pound
LONDON, July 17 (Reuters) - The pound slipped on Friday but was on track for its third consecutive weekly rise, with UK assets supported in recent days by reports that incoming prime minister Andy Burnham has chosen a centrist to be finance minister.
Sterling was last down 0.2% at $1.345, as it gave back some of its sharp gains on Wednesday and as the safe-haven U.S. dollar found some support from ongoing strikes in the Middle East.
Political Factors Supporting Sterling
Burnham’s Choice for Finance Minister
Yet it remained set to rise 0.4% this week after rallying on Wednesday when newspapers, including the Financial Times, reported that Burnham was likely to pick Shabana Mahmood as his finance minister over the more left-leaning Ed Miliband.
Traders took news of the likely appointment as a sign that Burnham, who is set to become leader of the governing Labour Party on Friday and prime minister next Monday, is not planning to ramp up spending as some investors had originally feared.
Market Reaction and Analyst Commentary
Government bonds rallied along with the pound, which has also been helped by a dip in the dollar this week.
"UK political developments have shifted from a headwind to a tailwind, with an orderly leadership transition and expectations of a fiscally prudent chancellor boosting market confidence," strategists at UBS Wealth Management said in a research note.
Sterling’s Performance Against the Euro
Recent Trends
The pound also retraced some of its recent rally against the euro on Friday, with the common currency up 0.15% to 85.03 pence.
Yet the euro was still on track for its fourth straight weekly decline against the pound, with sterling helped by greater political certainty and better-than-expected UK growth figures.
Outlook and Risks
Currency Valuation Concerns
However, ING currency strategist Francesco Pesole said the pound looked somewhat over-valued after rising to a 13-month high against the euro.
Interest Rate Expectations
Pesole said British bond yields could fall, knocking the attractiveness of the pound, if markets scaled back their bets for around 35 bps of Bank of England rate hikes this year, which he said looked too high.
(Reporting by Harry RobertsonEditing by Gareth Jones)
