British Pound: Funding concerns weigh on Sterling – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses United Kingdom (UK) markets’ reaction to PM Burnham’s new cabinet and fiscal plans, noting 10-year gilt yields above 5% and British Pound (GBP) weakness in G10. Foley highlights uncertainty over funding Burnham’s agenda, the UK’s low savings ratio and large current account deficit, and argues that UK debt markets are particularly sensitive to perceived negative news.

Burnham agenda unsettles UK assets

"UK markets have now had a few hours to react to PM Burnham’s new cabinet, many of whom have been involved in UK politics for years. 10-year gilt yields are currently above the 5% level, which is a sign of some anxiety. Similarly, the pound is the worst performing G10 currency on a 1-day view."

"However, it is still uncertain as to how Burnham plans to fund his agenda. Later this year, Burnham will announce his 10-year plan. Yesterday he commented that he will use ‘flexibility’ within the fiscal rules."

"In the short-term, Burnham has promised measures to ease cost-of-living pressures. He kicked this off this morning with the news that VAT on household electricity bills will be cut from October. The market is now bracing itself for a list of further announcements."

"The UK has a low savings ratio and a large current account deficit. These metrics can increase the sensitivities of its debt market to perceived bad news. The UK may not have the largest debt/GDP ratio in the developed world, but arguably it has one of the most sensitive debt markets."

"Given the jittery reaction in gilts and the pound to Burnham’s early announcements, his honeymoon period could be short-lived. We look for EUR/GBP to push higher to 0.8650 on a 3-month view. We see scope for dips in cable back to the GBP/USD 1.32 area on a 3-month view."