The pound, set for its largest monthly drop since March, edged up on Monday as Andy Burnham, Britain's likely next prime minister, laid out his plans for the economy in his first speech since becoming a lawmaker.
Burnham, who returned to Westminster this month after winning a parliamentary seat, is the only declared candidate to take over from Prime Minister Keir Starmer, and could be installed in Downing Street within weeks.
He said he would not announce any government appointments until the end of the selection process, and that his plans are consistent with the party's 2024 manifesto, committing to a series of fiscal rules that financial markets monitor.
The pound has lost 1.7% this month against the dollar, which has risen to its highest in around a year in response to an interim peace deal in the Iran war and a reassessment of the US rate outlook.
Sterling was last up 0.14% at $1.323, around its weakest in seven months, against a backdrop of political turmoil at home, including Starmer's resignation a week ago.
Gilt investors in particular are concerned about how Burnham plans to improve UK growth. The Labour lawmaker is known to favour more expansionary fiscal policies, something the UK would struggle to afford, given the limited headroom for extra borrowing or spending.
Few expect a repeat of former Prime Minister Liz Truss' attempt to boost the economy with billions of pounds in unfunded tax cuts that destabilised the gilt market so badly the Bank of England had to step in to stabilise it.
Who Burnham chooses as finance minister could determine whether UK borrowing rates are kept under control, analysts said.
"Gilt yields' behaviour since the pandemic, raising borrowing costs by nearly double in a handful of years and our continued deficit spending suggest that the last thing needed is a big round of handouts," Caxton strategist David Stritch said.
"Given what happened last time an ambitious, but unfunded, departure from economic orthodoxy was announced by a UK government, it ended in catastrophe. Burnham would be very wise to avoid the same pitfall," he said.
Starmer said last week he would step down, just two years after winning a huge parliamentary majority for Labour.
Given Starmer had been under pressure for some time to resign, financial markets had largely factored in the news and are instead focused on whom Burnham chooses as finance minister.
In the face of the political uncertainty, investors have built up the biggest bet against sterling since June 2015.
They hold a short position in the pound worth $8.72bn, according to weekly data from the Commodity Futures Trading Commission, the largest since May 2015's record $9.567bn.
This week also brings several other risk events for markets, including the monthly US employment report and a speech on Wednesday from new Federal Reserve Chair Kevin Warsh, who joins other global central bankers at the European Central Bank's annual gathering in the Portuguese town of Sintra.
