Starmer's resignation reduces political uncertainty in the UK; JPMorgan turns bullish on the pound again.

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As UK Prime Minister Starmer announced his resignation and the Labour Party quickly rallied behind the popular successor Burnham, Wall Street’s attitude toward pound-denominated assets swiftly turned optimistic. JPMorgan believes UK political risk is declining and has resumed a bullish stance on the pound.

On the morning of the 22nd local time, during early European stock trading, Starmer announced his intention to resign as Prime Minister. Former Health Secretary Streeting also openly expressed support, and former Mayor of Greater Manchester Burnham entered the race for party leader. The market quickly interpreted this as a sign of Labour Party unity, causing the pound to accelerate its rebound.

During European trading hours, the pound reversed a 0.4% drop against the dollar to rise, surging past 1.3270 to hit a new daily high after rebounding from last Friday’s drop below 1.3170, which had marked the lowest since late March.

JPMorgan's global foreign exchange strategist James Nelligan stated that Starmer’s resignation makes the UK political landscape “clearer”, giving Labour the opportunity to unite around Burnham, thus reducing the political uncertainty that has previously troubled markets. Based on these changes, JPMorgan has reinstated its bullish outlook for the pound, recommending long positions in an equally weighted currency basket against the euro, Swiss franc, and Swedish krona.

JPMorgan: Political uncertainty fades, the pound regains its appeal

In his latest report, Nelligan pointed out that Starmer’s resignation “brings greater clarity” to the political situation, allowing Labour to unite around Burnham under his leadership.

He believes that Burnham “has downplayed his stance on fiscal policy, which means arbitrage, UK resilience, valuations, and positioning can better support the pound.”

In other words, Starmer stepping aside for Burnham, who is now toning down previously radical fiscal positions, means the market focus will return to the British economic fundamentals and yield advantages, rather than political risks.

Back in April, JPMorgan recommended going long the pound against the Swedish krona, but recently adopted a wait-and-see approach amid the by-election results. Now, the firm resumes its long position and advises investors to bet on the appreciation of an equally weighted basket of the pound against the euro, Swiss franc, and Swedish krona.

However, JPMorgan also cautions that as the new government prepares its first budget, fiscal risk premium may reaccumulate, but will not be a dominant factor in the short term.

Burnham becomes the leading successor, Wall Street sees him as more "market-friendly" than expected

Andy Burnham, 56, won a resounding victory in last week’s UK Parliamentary by-election with 54.8% of the vote, defeating Reform UK candidate Robert Kenyon and consolidating his position within the Labour Party. With Streeting abandoning his campaign and publicly supporting him, Burnham has become the most popular candidate to succeed Starmer as party leader and Prime Minister.

In recent years, some investors worried that Burnham’s left-wing tendencies might lead to fiscal expansion and increased regulation. But recently, Burnham has repeatedly stressed fiscal discipline and sought to send stabilizing signals to the corporate sector.

Multiple Wall Street institutions believe that Burnham is actually taking a more pragmatic approach than previous market concerns suggested.

Goldman Sachs analysts previously pointed out that if Labour completes a smooth transfer of power internally, avoiding extended infighting, political discount for UK assets is likely to decrease. Barclays also believes that were Burnham to form a government, he would likely maintain the Bank of England’s independence and the fiscal framework, with little chance of radical policy shifts.

Market eyes new government’s budget, but short-term outlook favors risk assets

Analysts note that the UK market’s biggest worry currently is not a change in leadership, but whether the upcoming budget will expand the fiscal deficit.

If the Burnham government continues fiscal restraint while promoting infrastructure investment and regional economic rejuvenation, UK stocks, bonds, and the pound are all expected to benefit.

JPMorgan believes that the current UK economic growth remains resilient, and the Bank of England’s relatively high rates make the pound attractive among G10 currencies for carry trades. As political uncertainty subsides, investors will refocus on these advantages.

Looking ahead, the market will focus on government formation and the first fiscal budget. Nelligan stated that fiscal risk premium may eventually rise again, but in the short term, the clearer political situation means renewed support for the pound.

From the market’s reaction, investors seem more inclined to consider Starmer’s departure as the end of uncertainty, rather than the beginning of new risks.

Risk warning and disclaimerThe market involves risk, and investment requires caution. This article does not constitute individual investment advice and does not take into account the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions herein are appropriate to their circumstances. Investments made based on this are at one’s own risk. ```