ING’s Chris Turner writes that Sterling has benefited from expectations Andy Burnham will appoint a fiscally cautious chancellor, alongside stale short positioning and M&A-related flows into United Kingdom (UK) equities. Turner sees scope for limited further Pound strength during Burnham’s early days, but warns tight UK public finances likely mean tax hikes. EUR/GBP support is seen at 0.8470, with 0.8400 as a best-case level.

Political shift but fiscal constraints

"Andy Burnham is set to succeed Keir Starmer as the UK Prime Minister later today. Sterling has been doing quite well recently on the view that Burnham will select a more fiscally responsible chancellor in the form of Shabana Mahmood – an announcement that will probably emerge today."

"However, we think a larger part of sterling's strength owes to stale short sterling positioning, and we suspect some large M&A flows going through, where cheaper valuations have made UK equities an attractive proposition this year."

"While we do not rule out a little further sterling strength during the Burnham honeymoon period, the UK's tight fiscal situation suggests a new cabinet will have to turn to tax increases if it wants to build out its plans to improve areas such as social care."

"EUR/GBP has support at 0.8470, and 0.8400 might be the best-case for sterling this summer, but we would not chase the EUR/GBP move lower."

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