GBP: The damage is done – Commerzbank

British Chancellor of the Exchequer Rachel Reeves, who is committed to budgetary discipline, suddenly found herself alone when Prime Minister Keir Starmer unexpectedly withdrew his support for her in Parliament, Commerzbank's FX analyst Antje Praefcke notes.

Keir Starmer's unexpected withdrawal damages the GBP

"What had happened? The Prime Minister abandoned highly controversial welfare reform plans that would have meant cuts in some special expenditures, leaving Reeves suddenly having to cope with additional spending in her budget. In principle, she must quickly find £5 billion to meet the budget targets that have been set. At the same time, the Prime Minister appeared to be verbally distancing himself from her as finance minister."

"The market reacted with shock and punished the pound, sending 10-year interest rates skyrocketing. The pound has already gone through a similar crisis once before, caused by concerns about lax fiscal policy in the UK."

"Although Starmer repeatedly emphasized afterwards that he fully backed his finance minister, the damage has been done. The market can no longer be sure that budgetary discipline will really be maintained in the UK. It is irrelevant whether Reeves can continue, or whether and, if so, who Stamer will choose as her successor - the damage to the pound and long-term interest rates has been done."