File image of Wes Streeting, picture by Lauren Hurley / No 10 Downing Street.
Health Secretary Wes Streeting is set to challenge Prime Minister Keir Starmer for the top job, according to reports out Wednesday.
It is reported Streeting is to resign from his post in the coming days and trigger a leadership contest against Keir Starmer.
The news follows a brief meeting between Streeting and Starmer at 10 Downing Street earlier in the day.
For markets, the news of a challenge has been met with a cool response: the pound-to-euro rate holds near the day's highs at 1.1545 and the pound-to-dollar at 1.3515.
Streeting's move could be supportive for the pound for two reasons:
1) Streeting is the preferred candidate for markets as he is believed to be a centrist at heart who is likely to respect the UK's fiscal rules.
2) For markets the sooner a contest is resolved, the better. Markets dislike extended uncertainty, and this would preclude the left-wing rump of the Labour Party's favourite, Andy Burnham.
"Streeting would likely mean more centre-ground politics than Mr. Burnham, but the latter is much more likely to be selected by Labour Party," says Elliott Jordan-Doak, economist at Pantheon Macroeconomics.
However, this is hardly a relief rally moment for the pound: the best-case outcome would have been the rebellion dying out altogether; instead, Streeting looks ready to fan the flames.
While markets would probably prefer Streeting, the reality is that he's unlikely to succeed as the clear favourite is Burnham, who still has a mountain to climb in that he needs to concoct a by-election to re-enter parliament.
Data crunching by the Telegraph shows that the only seat he would safely win is Bootle, and that means kindly asking its incumbent to step aside.
Above: GBP/EUR has seen relatively limited damage wrought by recent political events.
Starmer will today introduce his legislative agenda to Parliament in what is known as the King's Speech. Next week, he is reportedly bringing forward the government's long-awaited defence spending review.
He looks intent on marching onwards, and if he can regain the legislative momentum, his position becomes more assured.
For the pound, that's the least-bad outcome that would allow it to recover from bouts of weakness driven by the political uncertainty of recent days.
But to us he looks wounded. He's deeply unpopular with the electorate and a growing chunk of his own party. Betting odds of him leaving before year-end are a high 85%, according to Polymarket.
"Whilst it is expected that the King’s Speech and State Opening of Parliament today will bring a somewhat of a hiatus in the battle for the Labour leadership, out of due deference to the monarch, it doesn’t feel like political risk has been extinguished for the gilt market and GBP," says Sam Hill, Head of Markets Insights at Lloyds Bank.
Above: GBP/USD still remains primarily driven by the USD.
Elliott Jordan-Doak, Senior UK Economist at Pantheon Macroeconomics, says the "recent market reaction to the likely demise of Sir Keir Starmer looks fair."
However, "the gilt sell-off has further to run if Sir Keir Starmer is forced out of office in the next few weeks," he adds.
UK borrowing costs, as measured by bond yields (or gilts), have risen sharply in recent days to reflect anxiety about the rising political temperature.
That reflects fears that a change in direction would result in a government willing to borrow and spend more, which is inevitably inflationary. When such nerves are on display, the pound also suffers.
"The bulk of MPs seem to want to shift leftwards, and more borrowing has been the path of least resistance in recent years," says Jordan-Doak.
Labour’s influential Tribune group of more than 100 MPs has called for less “caution” on fiscal policy in a new pamphlet that demands a change of direction to the left.
Above: The British ten-year gilt yield is at its highest level since 2008.
Louise Haigh, the Labour MP who chairs the group, says the current structure of the UK Treasury’s role in fiscal policy "resolved in favour of caution". Andy Burnham's supporters on Tuesday meanwhile caught the attention of the City, saying the market would have to "fall in line" with the need to spend more heavily on social causes.
That further's Burnham's argument that the fiscal rules should be changed to allow the government to borrow more to fund social housing.
Mohamed A. El-Erian, Former CEO of bond investing giant Pimco, explains that the market is judging fiscal discipline, and the UK is found wanting. He says discipline is more important at a time when external (non-UK) developments are intensifying economic and financial headwinds:
"The British Pound is under pressure... failing to find support despite a dramatic surge in yields. With the 10-year Gilt breaking above 5.10% and the 30-year yield hitting a level not seen since March 1998, the market is sending a clear signal that should serve as a sobering reminder: Convincing markets that fiscal stability will continue is a necessary condition to avoid a repeat of the 2022 'Liz Truss moment' that, among other things, pushed the UK pension system to the brink."