AWARDS
The pound has seen a strong rebound over the past 24 hours, with GBP/USD rising above 1.3400 after yesterday's low of 1.3303. The main driver of this upward resurgence was the reassuring news that potential Labour Party leadership candidate Andy Burnham has ruled out the possibility of changing the government's self-imposed fiscal rules, according to a spokesman. These comments will be interpreted as an attempt to reassure investors that Burnham will not seek to significantly ease fiscal policy if he becomes Prime Minister. Under current rules, the Chancellor of the Exchequer must match current spending with tax revenue by 2039/30 and reduce public debt—measured by public sector net financial liabilities—as a percentage of GDP by the same timeframe. The rules, in their current form, would continue to act as a brake on public spending. Presumably, the recent negative reaction from the government bond market is already putting pressure on Andy Burnham to adjust his policy agenda. This contrasts sharply with his statements last year, when he said the Labour Party needed to "get over this reliance on bond markets." He also advocated a £40 billion increase in public investment and the exclusion of defense spending from the fiscal rules. This apparent U-turn on fiscal policy should help mitigate the short-term downside risks to UK government bonds and the pound, stemming from increased political uncertainty in the UK. He also made another apparent U-turn by declaring, "I am not proposing that the UK consider rejoining the EU," as he seeks to win the Makerfield by-election and faces stiff competition from the Reform Party.
However, relief for the pound was dampened this morning by the release of much weaker-than-expected UK labor market data. The report revealed that paid employment contracted sharply by 100,000 in April, following a larger decline of 28,000 in March. This is the largest decline since the COVID shock in 2020. The ONS notes that the first months of the fiscal year are characterized by a heightened degree of uncertainty. The April data are likely to overstate the true extent of labor market weakness, although the overall report is consistent with persistent labor underutilization. This will dampen short-term market expectations for a Bank of England rate hike in response to the energy price shock. The UK rates market still expects a rate hike at the July Monetary Policy Committee meeting, indicating that market participants are not placing too much weight on today's exceptional decline in employment.
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