ING said Andy Burnham’s by-election win has strengthened expectations that he could become UK Prime Minister, with betting markets pricing a handover by the end of the summer. The scenario set out includes potential cabinet resignations intended to accelerate a transition from Keir Starmer, although a longer leadership contest remains an alternative.
The pound has shown no political risk premium over the past month, a pricing pattern that implies markets are comfortable that Burnham’s fiscal plans would not unsettle the gilt market. Even so, ING framed fiscal headlines as a potential upside risk to its generally bullish EUR/GBP view, arguing that GBP and gilts have had a low tolerance for negative budget-related news since 2022. The bank’s central case rests on its expectation of no further Bank of England hikes, reinforced by what it described as an uneventful meeting yesterday.
Political Transition Risk and Pound Stability
We see Andy Burnham’s decisive by-election win as paving the way for a leadership transition by late summer. Betting markets are reflecting this, with current odds implying an over 80% chance of a new Prime Minister before the autumn. This high conviction suggests we should position for a period of political change.
Right now, the pound shows little sign of stress, with implied volatility on three-month options holding near a one-year low of 6.2%. This tells us the market believes a Burnham government will not pursue disruptive fiscal policies. We feel this confidence could be misplaced, presenting an opportunity for traders.
Trading Strategy and Fiscal Policy Risk
Our main view is to favor the euro against the pound, anticipating a move towards 0.8800 in EUR/GBP. The Bank of England is firmly on hold, reinforced by the latest CPI inflation figure of 2.1% and sluggish Q1 GDP growth of just 0.1%. This policy stance leaves sterling vulnerable, especially as political headlines emerge.
The memory of the gilt market crisis in autumn 2022 means any unexpected fiscal announcements could cause a sharp reaction. We are therefore buying cheap, out-of-the-money EUR/GBP call options with August and September expiries. This strategy offers a low-cost way to profit from a sudden sterling drop if political risk is repriced into the market.
