Burnham's Fiscal Choices: A Crucial Test for GBP

Rabobank's Senior FX Strategist Jane Foley discusses the outlook for the British Pound (GBP), focusing on UK welfare reform, shifting voter polls, and the upcoming Bank of England decision. According to Foley, PM Burnham's fiscal choices will be crucial in shaping the gilts market and the pound.

Foley notes that hints of fiscal restraint have pleased both the gilts market and GBP today, but warns that it will be a 'big test' of Burnham's premiership. Labour MPs have warned the PM that they would lose their support if he approached welfare reform with 'punitive cuts'. For now, the markets and electorate appear willing to give Burnham the benefit of the doubt.

However, Foley expects friction within the Labour party over welfare reform, which could be directional for both gilts and the pound. She believes that if Burnham can demonstrate fiscal prudence while maintaining coherence within the party, the outlook for GBP will turn more positive. Nevertheless, there is significant scope for political friction to arise.

Foley concludes that given the potential for disappointment over a lack of rate rises from the Bank this year and the likelihood of political friction over budget cuts, there is risk of an upside bias in EUR/GBP towards 0.87 on a three-month view.