City traders have initiated their largest bet against the British pound in nearly a decade, a move that signals a lack of confidence in the economic outlook under potential Prime Minister Andy Burnham. Speculators are increasing sell positions, anticipating that sterling will decline against the dollar and other currencies if Burnham's government adopts left-leaning policies.
The £7 billion wager against the pound emerges as Burnham, poised to succeed Keir Starmer and potentially enter Number 10 Downing Street this month, attempts to reassure financial markets. He has committed to maintaining fiscal rules aimed at curbing excessive borrowing and adhering to Labour's 2024 manifesto pledges, which include not raising VAT, income tax, or employee National Insurance.
However, Burnham has also indicated that other taxes could increase, while ruling out significant cuts to the welfare budget. His recent major policy speech, which proposed devolving more power to English regions, had a limited impact on bond markets, although government borrowing costs remain elevated.
Sterling recently fell to $1.32, its lowest point against the dollar in seven months, following Burnham's success in the Makerfield by-election, which cleared his path back to Parliament and positioned him as the front-runner to lead the Labour Party. The current level of speculative bets against the pound is the highest since the period following the Brexit referendum nearly ten years ago.
"The pound is often the market’s first pressure point when confidence in the UK outlook starts to deteriorate," said Chris Beauchamp, chief market analyst at IG. Data from the U.S. regulator, the Commodity Futures Trading Commission, shows over 100,000 "net shorts" – bets against sterling – have been taken out, valued at more than £6.5 billion.
Traders began shifting to a negative stance on sterling a year ago, driven by concerns about Labour's fiscal management. Burnham and his prospective Chancellor will face a £15 billion shortfall in public accounts, intended to fund a planned increase in defense spending. This would further diminish the already narrow fiscal headroom of £24 billion left by the incumbent Chancellor, Rachel Reeves, in her last budget.
Experts suggest that sterling faces challenges, particularly if Ed Miliband is appointed Chancellor. Matthew Ryan, head of market strategy at foreign exchange firm Ebury, described Miliband's potential appointment as a "clear negative" and a "critical risk factor" for the pound. Markets are reportedly wary of Miliband's inclination towards "expansionary fiscal policy – in particular, ramped-up spending on the green transition."
Chris Turner, global head of markets at ING, anticipates that political pressures on sterling may resurface by the end of July or in August. He noted that, as Keir Starmer discovered, the UK's fiscal constraints limit policy options, making significant spending increases unlikely without accompanying tax hikes.
Burnham has maintained a low profile since his by-election victory. His proposals include granting mayors greater authority to stimulate regional growth, moving away from "trickle-down" economics, and bringing utilities like water and energy back under public control. The choice of Chancellor will be a key factor, with Yvette Cooper and Wes Streeting also mentioned as potential candidates alongside Miliband. Pensions Minister Torsten Bell and former Housing Minister Miatta Fahnbulleh are also being considered for senior Treasury roles.
A weaker pound could lead to higher prices for imported goods, including fuel, food, and electronics, potentially fueling inflation and keeping interest rates higher for longer, which would impede economic growth. Conversely, a sell-off in sterling might benefit the stock market, as many FTSE 100 companies derive significant revenue overseas, and a weaker pound can bolster their international earnings.