Pound swings higher after Sir Keir Starmer announces resignation - economic reaction as Prime Minister quits

The pound swung back higher to erase early losses on this morning after Sir Keir Starmer confirmed his plan to step down as Prime Minister.

Sterling was up 0.05 per cent at 1.324 US dollars in morning trading, having been around 0.3 per cent lower shortly before the departing Prime Minister’s speech.

It was meanwhile up 0.07 per cent at 1.154 against the euro. The pound has already lost around 3 per cent since February as Sir Keir’s leadership has come under increasing threat from Labour party challengers.

It comes as Andy Burnham – the Greater Manchester Mayor – is due to make his return to Westminster today, having won the Makerfield by-election last week, paving the way for him to mount a leadership bid.

Financial markets were otherwise in wait-and-see mode, with the FTSE 100 Index down remaining just over five points at 10,357.97.

UK Government bond yields – which will also be watched closely for any reaction to a change at the top of Government – were steady, with the 10-year yield flat at 4.845 per cent.

The yield had been higher prior to the announcement. Gilt yields move counter to the value of the bonds, which means their prices fall when yields rise.

Analysts have said gilt yields, while having recovered from levels seen at the worst of the Iran conflict, remain higher than international peers.

Chris Beauchamp, chief market analyst UK at investing and trading platform IG: “While the UK now has to wait to see who fancies their chances in the leadership election, the strong possibility that Burnham is the sole candidate has boosted sterling back above 1.32 dollars.

“In addition, Starmer’s decision not to fight in any contest further reinforces the coronation narrative, as the party looks to unite behind a leader and get back to proving their worth to govern.”

Sir Keir also laid out his potential timeframe for departure, with nominations for a new leader set to open on July 9. The Prime Minister said he would ask Labour’s ruling National Executive Committee (NEC) to set out a timetable that would see a new leader in place by the time Parliament returns from its summer recess on September 1.

Traders are therefore preparing for further volatility as they await more details over Andy Burnham’s potential policy stance and whether he may face opposition in the leadership process.

Joe Nellis, economic adviser at MHA, said: “Investors are now focusing on what an Andy Burnham premiership will look like. The volatility in the market reflects that perhaps not even Mr Burnham knows what this looks like.”

Mr Burnham has stated that he would stick to the fiscal rules set by Chancellor Rachel Reeves and has agreed that the UK needs a plan to reduce its debts. However, he refused to name them in an interview with Newsnight.

This came after Mr Burnham made controversial comments last year, that the Government should not be “in hock to the bond markets”.

His about turn implies that he does not want to spook the country’s bond markets by indicating that, at least in the short term, he would not set out to substantially increase government borrowing.

He has also committed to the Labour party’s manifesto pledge not to raise income tax or national insurance contributions for working people. However, the politician spoke about there being a “final chance to change” after his by-election win, and laying out his vision for the UK economy.

This included calling for the need to bring down water and energy bills and rail fares, having previously advocated for key utilities to come under greater public control, and the “re-industrialisation” across the north of England.

One of the biggest concerns for the financial markets will be who will take up the role of Chancellor under a new Cabinet.

Dan Coatsworth, head of markets for AJ Bell, said: “Burnham’s choice of Chancellor if he becomes prime minister could have a major impact on bond markets.

“Bond investors like boring and dull – they want someone who has a plan where the maths stacks up and they stick to it.

“Former transport secretary Louise Haigh is seen as one of Burnham’s closest allies, but a fraud conviction could stop her from being the country’s numbers person.

“Ed Miliband is also being touted as a potential candidate for chancellor and would bring considerable experience from prior senior political roles.”

Some economists have suggested that Mr Burnham is likely to lean towards the left of his party when it comes to future economic policies.

Rob Wood and Elliott Jordan-Doak, economists for Pantheon Macroeconomics, said he could “pitch to Labour MPs’ left-leaning instincts for more spending, funded by higher taxes and moderately looser fiscal rules, as well as additional regulation”.

But they added: “We think Mr Burnham would be wary of a big bang fiscal change, because he needs to avoid a repeat of the gilt market meltdown that torched the previous Conservative government’s reputation for economic competence. But risks clearly lean to more spending.”

Ultimately, the City will be wanting certainty over the next leader and their plans for the economy and will be nervous about any plans that signal unfunded spending.

Kathleen Brooks, research director at XTB, said Mr Burnham would have to “work to persuade financial markets that he is the right man for the job to grow the UK economy and get debt back under control”.