Edward Park, Chief Investment Officer at Brooks Macdonald, comments:
“Sterling rallied early today with the news that Boris Johnson had exited the contest after investors on Friday feared Johnson’s return could lead to an ongoing lack of unity within the government. While it is too early to conclude whether Sunak will be able to unify the Conservative Party, he is seen as a safe pair of hands economically who will work in partnership with the Bank of England to restore the UK’s finances.
“Earlier in the trading session sterling held on to its gains when currency investors positioned for Sunak to take over as Prime Minister. 10-year UK Gilt yields remain well below 4% at 3.82%, one of their lowest levels in a month, as bond markets welcome a fiscally conservative Prime Minister. Lower gilt yields will reduce the borrowing costs of the UK government and a new fiscal outlook may allow the Bank of England may be less aggressive with their interest rate policy.
“Sunak is expected to keep Jeremy Hunt as Chancellor, given their alignment over economic policy and Hunt’s recent performance in steadying the markets in the aftermath of the ‘mini-budget’. A Sunak and Hunt alliance would be welcomed by financial markets eager to move on from a tumultuous month of political chaos.
“While a less hawkish Bank of England would traditionally lead to a weaker sterling, the UK political backdrop has been the dominant market story rather than monetary policy alone. A more stable political environment is likely to trump any concerns that currency traders have over a less hawkish Bank of England, supporting sterling.
“Political stability in the UK should bring down the cost of government borrowing as well as providing strength to the pound. This could help tackle the cost-of-living crisis, which has been exacerbated by inflation in foreign goods over the last month as the UK’s currency weakened against its global peers.”