British Pound: Political risks and Gilt reprieve – Societe Generale

Societe Generale strategists note that the recent selloff in Gilts has eased after long-end yields spiked to multi-year highs on fears of looser fiscal rules under a more left-wing Labour leadership. They highlight internal Labour Party dynamics, with several senior figures leaning left on spending and borrowing but favouring closer EU ties, while identifying Wes Streeting as the most market-friendly, fiscally conservative option.

Gilts steady as Labour risks evolve

"In the UK, the selloff in Gilts abated after the spike to multi-year highs in long-end yields over concerns for a loosening of fiscal rules under a more left-wing Labour party leadership."

"Health Secretary Wes Streeting could trigger a leadership contest as early as today and with Andy Burnham not in a position to contest, Angela Rayner indicated she may run after being cleared by HMRC of deliberate wrongdoing over tax affairs."

"She said that Starmer should reflect on stepping aside and could be a stalking horse for Burnham until he secures a seat in Parliament. Rayner, Burnham and Miliband lean left with regard to spending and borrowing but are in favour of closer ties with the EU."

"Streeting is the most market-friendly option, offering continuity on the fiscal rules and is also in favour of closer alignment with the single market or customs union."

"EUR/GBP retraces below the 50dma at 0.8670 in early trading. GBP/AUD traded a new cycle low of 1.86, a level which featured as a turning point in Dec-23. This time, further downside could be on the cards."

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