Key Moments
- Commerzbank’s Michael Pfister flags growing political uncertainty around UK Prime Minister Keir Starmer and a possible Andy Burnham succession as a risk for the Pound.
- Pfister cautions that either a prolonged leadership contest or a looser fiscal approach could put sustained pressure on Sterling.
- With the ECB expected to tighten further and the Bank of England seen on hold, Pfister anticipates EUR/GBP could move to higher levels in the coming weeks.
Political Risk Takes Center Stage for Sterling
Commerzbank strategist Michael Pfister underscores that mounting uncertainty in UK politics, centered on Prime Minister Keir Starmer and the prospect that Andy Burnham could succeed him, is increasingly important for the British Pound’s trajectory. He emphasizes that the way any leadership transition unfolds, and the associated policy stance, will be crucial for Sterling’s performance.
According to Pfister, a prolonged internal contest for power within the government could undermine confidence in the currency by amplifying uncertainty over the policy outlook and the durability of existing fiscal rules.
Market Sensitivity to Leadership and Fiscal Policy
Pfister notes that market reaction is likely to be highly sensitive to Andy Burnham’s approach if he moves into a leadership role. He draws a distinction between a scenario in which fiscal continuity is maintained and one in which existing budgetary constraints are questioned.
He argues that relatively small shifts in perceived fiscal discipline could trigger outsized currency moves, with downside risks for Sterling if investors conclude that the policy framework is being relaxed.
| Scenario | Expected Impact on GBP |
|---|---|
| Prolonged power struggle | Negative due to heightened political uncertainty |
| Burnham maintains current fiscal stance | Positive reaction from the Pound |
| Fiscal rules are challenged | Significant depreciation risk for Sterling |
EUR/GBP Outlook Backed by Policy Divergence
Beyond domestic politics, Pfister also points to expected monetary policy divergence between the Bank of England and the European Central Bank as an additional factor shaping the EUR/GBP outlook. He contrasts a scenario in which the Bank of England keeps interest rates unchanged with expectations that the ECB will implement another rate increase in September.
In his view, the combination of UK political risk and a comparatively tighter ECB stance relative to a steady Bank of England supports a constructive view on EUR/GBP. Under these conditions, Pfister believes the cross is likely to aim for higher levels in the coming weeks.
Unchanged Quotes From Commerzbank
“If a power struggle ensues, the pound is likely to suffer from the resulting uncertainty.”
“Burnham will endeavour not to unsettle the markets too much. The risks, however, are likely to be asymmetric. If he succeeds in maintaining the status quo, the pound will react positively.”
“But if he calls the fiscal rules into question, the pound is likely to depreciate significantly.”
“Given these political risks, we remain sceptical about the pound for the time being. If the Bank of England leaves interest rates unchanged while the ECB delivers another rate rise in September, as we expect, EUR-GBP is likely to target higher levels in the coming weeks.”
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