Pound heads for worst week in 18 months as Andy Burnham launches Labour leadership bid

The pound fell 2.2% against the dollar during the week to $1.332 on Friday, a five-week low, heading for its largest weekly drop since Donald Trump’s election win in early November 2024. Sterling dropped against the dollar every day this week as leadership tensions gripped Westminster, culminating in the prospect of Manchester Mayor Andy Burnham challenging UK Prime Minister Keir Starmer after Burnham announced he would run for parliament in the north-west constituency of Makerfield.

“The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring,” said Kathleen Brooks, research director at XTB. “This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect,” Brooks added.

UK 10-year bond yields jumped to 5.18%, their highest level since 2008, amid a wider sell-off of sovereign debt. Thirty-year bond yields hit 5.85%, above the 28-year high reached earlier that week. The sell-off reflected concerns in the City that a Burnham premiership may loosen the UK’s fiscal rules and increase borrowing to fund higher spending. Investors remember that in January, Burnham said the UK was “in hock to the bond markets” and trapped in “a low-growth doom-loop”. Burnham has since softened his stance in interviews.

Neil Wilson, investor strategist at Saxo UK, said markets would not like the idea of the Labour party anointing a left-leaning PM whose fiscal views — and his views of the bond market — were well known. “Ultimately the bond market is likely to impose fiscal discipline, but it can get messy before that happens,” Wilson added. Mark Dowding of RBC BlueBay Asset Management told clients that Keir Starmer’s days in 10 Downing Street were “numbered … and against this backdrop UK financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period”.

Burnham must first win a byelection in Makerfield, where the sitting MP Josh Simons has a majority of just over 5,000 votes. Bill Diviney, head of macro research at ABN Amro, said Burnham was popular with the public: “Manchester mayor Andy Burnham is by far the most popular among the general public, and in YouGov polling he is actually the only major politician in the UK with a net positive approval rating.” Diviney added: “A factor that would significantly help is if Rachel Reeves keeps her role as chancellor.”