Sterling Edges Down, Holds Firmly Above $1.32

The British pound weakened against a firmer US dollar but remained comfortably above $1.32 as investors balanced easing political uncertainty with weaker UK economic data. Sterling gave back some of the previous session’s gains as the dollar regained ground and broader market sentiment softened. Investors welcomed signs that a prolonged Labour leadership contest was becoming less likely after Keir Starmer announced his resignation. Andy Burnham is now seen as the leading candidate to replace him, with backing from former health secretary Wes Streeting reducing the risk of a drawn-out leadership battle. On the economic front, June flash PMI data showed a weaker picture, with the composite index falling to a 14-month low of 49.4, below expectations and signalling a second consecutive month of contraction. Rising input costs and accelerating services inflation continue to complicate the Bank of England’s policy outlook.

The British pound rebounded toward $1.33 after falling to its lowest level since March earlier in the session, as markets reacted to Prime Minister Keir Starmer's resignation, paving the way for a change in the UK's leadership. The resignation follows Greater Manchester Mayor Andy Burnham's by-election victory last week, which enabled his return to Parliament. Burnham subsequently announced his intention to seek the premiership. Prospects for a smooth leadership transition improved after Wes Streeting, previously viewed as a potential challenger, declared his support for Burnham's candidacy. Investors are now focused on the implications for the UK's fiscal outlook, seeking greater clarity on Burnham's fiscal policy agenda, with few concrete details available so far. A key concern remains the possibility of increased gilt issuance to finance higher public spending, which could further strain the UK's already fragile public finances and elevated debt burden.

The British pound weakened to $1.32 on Monday, approaching its lowest level this year after Prime Minister Keir Starmer resigned. Starmer's departure preludes a Labour Party successor by the start of September, with long-time Manchester mayor Andy Burnham seen as favorite to take the leadership role after winning the by-election last week. Burnham is seen as a fiscal dove and called for higher government expenditure, thus pressuring the sterling and lifting gilts across the curve, driving foreign investors to pivot out of pound-denominated assets as yields were already at their highest among G7 members. On the monetary policy front, the Bank of England left interest rates unchanged at 3.75% this month and maintained a cautious stance. The central bank also revised down its forecast for peak inflation in the fourth quarter of 2026 to 3.25%, from a previous estimate of 3.6%.