Natixis Warns UK Reform Agenda Carries Risks for Pound

The British pound held near flat at the start of the week as investors weighed the political transition after Andy Burnham became the next UK prime minister. GBP/USD traded around 1.2650, little changed from Friday's close, with the session lacking a major data catalyst.

Natixis warned that Burnham's reform agenda carries risks if it prioritises spending over fiscal discipline. The French bank said the new government's ability to balance infrastructure investment with deficit control will determine whether gilt yields rise or stabilise. A wider fiscal gap would push borrowing costs higher and pressure sterling. That would complicate the Bank of England's rate path, Natixis said.

Cabinet appointments and the first fiscal statement will offer early signals on the government's priorities. The Treasury is expected to release a spending review timeline within weeks. Sterling speculative positioning has been trimmed since the election, traders said. The pound's muted reaction reflected caution rather than conviction.

The Bank of England meets on May 8. Markets price roughly 40 basis points of cuts by year-end, implying one full reduction and a second in doubt, traders said. A Burnham government that signals higher borrowing would reduce the odds of a May cut, because the BoE would factor in fiscal stimulus when forecasting inflation.

The reform agenda could lift UK growth potential over time. That would support sterling. The near-term risk is that markets price higher borrowing before the growth materialises, pushing gilt yields up and the pound down.