EUR/GBP: Upside bias with UK risks – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights that UK gilts and the Pound are underperforming as political pressure on Prime Minister Keir Starmer intensifies. The bank expects Labour’s weak standing and fiscal credibility challenges to weigh on UK assets. With UK nominal GDP growth below 10-year gilt yields, BBH anticipates EUR/GBP will grind higher in line with interest rate differentials.

UK politics and fiscal worries support Euro

"Long-term gilts are lagging global peers, while GBP is underperforming EUR. UK Prime Minister Keir Starmer is in the hot seat again after being accused of misleading parliament about whether Peter Mandelson had passed security checks before his appointment as ambassador."

"The real test for Starmer’s leadership will be the aftermath of the May 7 local and Scottish elections. Starmer’s Labour Party is poised to get trounced, potentially setting the stage for a leadership challenge. A leadership contest can be triggered if the leader resigns or a challenger secures the backing of at least 20% of Labour MPs."

"Starmer is the most unpopular British prime minister since record began, even worse than Liz Truss’s 49-day in office. As such, his exit will not be a big shock to financial markets. The surprise would be if he managed to stay on as prime minister. Regardless, with or without Starmer, the governing Labour Party faces an uphill battle to restore fiscal credibility. UK nominal GDP growth is tracking below 10-year gilt yields, making stopping debt growth very difficult. As such, we expect EUR/GBP to grind higher in line with rate differentials."

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