Sterling rallies 1.1% as Burnham picks fiscally conservative chancellor

Andy Burnham's expected appointment of Home Secretary Shabana Mahmood as chancellor has triggered the biggest one-day rally in sterling in three months, with EUR/GBP and GBP/CHF breaking out of established technical channels.

Sterling surged 1.1% to $1.353 on Wednesday, its strongest single-day gain since April, after incoming Prime Minister Andy Burnham settled on Home Secretary Shabana Mahmood as his chancellor pick, signaling fiscal continuity rather than a leftward shift in economic policy.

"I think the market is relieved that it's looking like the new chancellor will not be from the left of the party," said Lee Hardman, senior currency analyst at MUFG.

The rally extended across FX markets, with EUR/GBP breaking below its two-month trading range and GBP/CHF clearing resistance to reach levels not seen since early June. UK government bonds also benefited, with the 10-year gilt yield falling 5 basis points to 4.93%, outperforming European peers as the equivalent Italian yield rose 3 basis points.

The choice of Mahmood — a disciplined operator with no economics background but deep trust from Labour's right wing — removes the tail risk of an ideologically-driven Treasury that had worried bondholders. Weeks of speculation had pointed to Energy Secretary Ed Miliband, whose soft-left reputation and net-zero push had alarmed trade unions and parts of the City. Lord Walker, who served as Keir Starmer's unpaid cost-of-living tsar, had warned that bond markets would "freak out" if an ideological chancellor arrived at the Treasury.

The personnel decision caps a decisive week for Burnham, who secured overwhelming backing from Labour MPs and crossed the crucial trade union threshold, clearing his path to become party leader on Friday and prime minister on Monday. Miliband is now expected to move to the Foreign Office, where colleagues suggested his soft-left politics may be easier to sell abroad.

Fiscal discipline meets tax uncertainty

While Mahmood's appointment calmed near-term market nerves, Burnham's own comments suggest the fiscal path ahead remains uncertain. In an interview with Gary Lineker's Goalhanger podcast, the prime minister-in-waiting warned that fiscal decisions would be "difficult" and refused to rule out new wealth taxes.

"We are going to have to work quite hard to make sure we can pay our way," Burnham said. "And at some point that might be having to ask for a little more."

Conservative leader Kemi Badenoch responded on X that Burnham was "already talking about raising your taxes again," while the OECD warned that Britain's record tax burden meant the new prime minister would need to focus on spending cuts, cautioning against further raids on households and businesses.

Behind the scenes, Burnham has been advised by economists including former Goldman Sachs chief economist Lord Jim O'Neill and former Bank of England chief economist Andy Haldane. Ally Louise Haigh has pushed for a beefed-up No. 10 driving a pro-growth agenda, suggesting economic strategy may be set from Downing Street rather than the Treasury.

Ranjiv Mann, senior portfolio manager at Allianz Global Investors, said investors now wanted clarity on the policy agenda and expected attention to "really start to shift back to macroeconomics."

Burnham's spokesperson said cabinet roles would only be confirmed on Monday. Rachel Reeves, the current chancellor, is among those waiting to learn if she has a role in the new government.

This article is for informational purposes only and does not constitute investment advice.