HSBC argues that the pound is at greater risk of falling following the resignation of Prime Minister Starmer and the ensuing leadership struggle in the UK. The bank highlights a less supportive macro environment, with UK and US two-year bond spreads narrowing to almost zero, the Bank of England rate of 3.75% expected by year-end, and deteriorating fiscal optics likely to weigh on the British pound in the coming months.
Politics and macroeconomic problems for Pound
“In the UK, Prime Minister Starmer’s resignation has shifted market attention to the leadership battle and policy direction of the next prime minister. Limited transparency suggests sterling appears more at risk of deterioration than improvement. Candidates must make a declaration by July 9.”
“If favorite Andy Burnham (Polymarket, June 22) is unchallenged, a quick turnaround could see him in office by July 16.”
“Outside of politics, the macro backdrop is less supportive. Two-year rate differentials between the UK and the US have narrowed sharply, from around 66bps in April to around 0bps, reducing carry support that has helped to strengthen sterling. This reflects the Fed’s hawkish shift (June 17) compared to the Bank of England’s (BoE) cautiously keeping the interest rate at 3.75%, with our economists expecting BoE will remain unchanged until the end of the year.”
“The fiscal optics have also deteriorated, with government debt exceeding the UK Office for Budget Responsibility’s (OBR) forecast for the second month in a row. All of these factors are likely to weigh on sterling in the coming months.”
“UK leadership uncertainty makes sterling more vulnerable to declines.”
(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor.)
