British Pound: Political risk premium unwound against Euro – ING

ING’s Francesco Pesole argues that the Pound has largely priced out recent UK political risk, with the EUR/GBP political risk premium, estimated at about 1% in mid-May, now back to zero. He notes lingering upside risks for EUR/GBP as some risk could be repriced, but sees difficulty for the pair to hold above 0.870 without clear ECB or BoE surprises.

Pound stabilises as risks repriced

"The pound appears to have largely priced out political risk over the past 10 days. We estimate that the EUR/GBP political risk premium (short-term overvaluation) peaked at around 1% on 15 May and has since been unwound back to zero."

"This mainly reflects decreased media attention on the topic and the difficulty in pinning down the timing of any leadership challenge. With Prime Minister Keir Starmer pledging to fight on, the most plausible window for a new candidate to emerge would be around September, after a leadership challenge through the summer."

"Against a backdrop of heavy external headlines, that risk is not especially easy to price into FX at this stage."

"The other key factor is that Andy Burnham, the Mayor of Greater Manchester and the candidate seen as the frontrunner by betting markets (and likely the market), has recently adopted a more market-friendly fiscal stance, indicating he would not alter the existing fiscal framework or loosen borrowing limits."

"Overall, upside risks for EUR/GBP remain, as some political risk could be repriced. However, absent a particularly hawkish ECB or a dovish Bank of England, the pair may struggle to trade sustainably above 0.870 in the very near term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)