British Pound: Fiscal risks cloud outlook – Commerzbank

Commerzbank’s Thu Lan Nguyen notes that recent optimism around United Kingdom (UK) Prime Minister Burnham faded quickly, with British Pound (GBP) gains versus Euro fully reversed. Markets are focused on his plans to cut the cost of living via tax relief and more social housing, while avoiding major tax hikes. This raises concerns about UK debt sustainability and suggests a volatile period for Pound investors.

Debt concerns weigh on Pound

"On Monday I had already warned that the euphoria around Burnham would at some point give way to a certain sobering. This then materialised more quickly than expected. Yesterday, sterling fully gave back its gains against the euro accumulated since the middle of last week."

"The trigger was the first insight into the new Prime Minister’s policy plans: one of his first stated goals is to reduce the cost of living. Among other things, this is to be achieved through tax relief (temporary suspension of VAT on electricity, an increase in the tax-free allowance). In addition, he has declared war on homelessness and held out the prospect of expanding social housing. At the same time, there are still to be no major tax increases."

"One of the first questions the market is clearly asking itself in this context is: who is going to pay for this? And thus concerns about the UK’s long-term debt sustainability are back in the spotlight."

"The big question remains: how will this new government handle the difficult balance between fiscal sustainability and stimulating growth?"

"At the very least, Burnham’s promise of a “new economic model” for the UK does not suggest that he will shy away from major measures. This, in turn, entails considerable risks for an already fragile market sentiment. Pound investors may face a volatile period."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)