The British Pound remained under pressure at the start of the week as investors reacted cautiously to rising UK political uncertainty and renewed volatility in gilt markets.
The Pound to Dollar (GBP/USD) exchange rate drifted back towards 1.3380, while EUR/GBP edged higher as Sterling struggled to attract support.
Deutsche Bank notes that markets have started rebuilding a political risk premium into UK assets following increased speculation surrounding Andy Burnham’s future political ambitions.
The bank considers that concerns surrounding fiscal credibility and potential increases in government borrowing are becoming more relevant for Sterling direction.
“Markets are increasingly focused on the implications for fiscal policy and gilt supply.”
Deutsche Bank also notes that recent volatility in UK government bond markets has added to pressure on the Pound, particularly as global yields continue moving higher.
The bank considers that Sterling remains vulnerable if political headlines continue intensifying or if gilt-market conditions deteriorate further.
At the same time, Deutsche Bank still sees the Pound relatively better supported against lower-yielding European currencies given ongoing structural growth concerns within the eurozone.
Near-term direction is likely to depend heavily on developments in global bond markets and incoming UK fiscal commentary.
For now, the bank considers that political uncertainty is becoming an increasingly important negative for Sterling.
