Lee Hardman at MUFG highlights that the British Pound (GBP) has strengthened sharply, helped by reports that Shabana Mahmood is set to become the next UK chancellor, reinforcing expectations of “sound public finances” under Prime Minister in-waiting Andy Burnham. Reduced United Kingdom (UK) fiscal and political risk, alongside stronger-than-expected UK Gross Domestic Product (GDP) data, has supported Pound outperformance even as markets fully price in further Bank of England (BoE) rate hikes.

Lower risk premium and firmer UK growth

"The pound has continued to trade at stronger levels after strengthening sharply yesterday in response to media reports that Home Secretary Shabana Mahmood is set to become Britain’s next chancellor."

"The paring back of the UK fiscal/political risk premium helped the pound to outperform over the past month."

"EUR/GBP has fallen by around -2.5% since the high on 22nd June."

"The UK rate market has moved to fully price back in a couple of BoE rate hikes in the year ahead."

"There was also some good news for the pound this morning from the release of monthly UK GDP data for May which has raised our forecast for growth in Q2 up to 0.3% providing further evidence of stronger than expected growth in 1H of this year."

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