According to MUFG’s Lee Hardman, the British Pound has been the best performing major currency in recent weeks, demonstrating resilience despite a negative energy price shock [1]. This outperformance is attributed to a notable increase in UK real yields, which has enhanced the Pound's attractiveness and provided sufficient compensation for the perceived rise in UK political risks [1]. The current environment of low FX volatility has further supported carry trades, making the higher yields in the UK particularly appealing to investors [1].
Market participants have also been reassessing UK fiscal and political risks following Andy Burnham's appointment as Prime Minister, with expectations that his leadership will be pro-business and fiscally responsible [1]. As a result, initial concerns over fiscal and political risks have been scaled back, contributing to the Pound's recent strength [1].
However, MUFG notes that much of the positive news is now reflected in the Pound's valuation, which may limit further upside potential for the currency [1].
CONCLUSION
The British Pound's recent outperformance has been driven by higher UK real yields and a reassessment of political risks under new Prime Minister Andy Burnham. While the market environment remains supportive, MUFG cautions that further gains may be limited as much of the good news is already priced in.