ING’s Francesco Pesole notes that Gilts and the Pound saw turbulence as new UK Prime Minister Andy Burnham signalled flexibility on fiscal rules and appointed John Healey as Chancellor. Sterling’s initial reaction was limited and it later recovered on stronger jobs data, but analysts still see vulnerabilities for recently outperforming GBP and argue EUR/GBP remains cheap with upside risks.

Gilts underperform as politics shift

"UK Prime Minister Andy Burnham's first day in office brought some market turbulence. 10-year gilts materially underperformed other European bonds after he said he intends to use flexibility within the fiscal rules, triggering a negative, albeit limited, reaction in sterling."

"Attention this morning will be on the bond market response to yesterday's post-market surprise appointment of John Healey as Chancellor of the Exchequer. Sterling ignored the headline initially and is recovering this morning, partly helped by some decent jobs market figures. But stabilisation in the bond market is needed for the pound to fully regain its strong momentum."

"That said, based on GBP’s muted reaction, Healey is probably not seen as materially different from the previously favoured frontrunner, Shabana Mahmood. In either case, the prevailing expectation is that Burnham will take a leading role in economic policymaking and therefore preferred a loyal appointment over a figure with stronger independent policy views, such as Ed Miliband."

"EUR/GBP remains cheap according to our short-term valuation metrics, and the lack of any political/fiscal risk premium – alongside overly aggressive pricing on Bank of England tightening, in our view – argues for upside risks in the pair."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)