22.07.202612:40 Forex Analysis & Reviews: GBP/USD: Burnham, Inflation, and the Labor Market Increase Pressure on the Pound

GBP/USD has declined by nearly 200 points over the past few days, posting an almost uninterrupted downward move. Just one week ago, buyers pushed the pair to a new two-month high of 1.3557. However, sellers took control the very next day, driving the pair down to the 1.3360 support level (the middle Bollinger Bands line on the daily chart, which coincides with the Kijun-sen line). Notably, the pair's decline has been driven less by renewed strength in the U.S. dollar than by weakness in the British pound. The main catalyst for the sell-off in sterling was the appointment of Andy Burnham as the UK's new Prime Minister. Mixed labor market and inflation data added further pressure to the pair, which yesterday fell to a new weekly low.

In my view, the pound's negative reaction was caused not so much by Burnham's appointment itself as by the messages the market heard in his first statements after taking office. Before that, traders had remained relatively calm and even optimistic—as reflected by GBP/USD reaching a two-month high—because members of his team had repeatedly emphasized their commitment to the existing fiscal rules. However, his subsequent rhetoric became less unequivocal.

In particular, market participants were concerned by his remarks about possible "flexibility" in applying the government's fiscal rules. Although Burnham did not formally abandon his predecessor's fiscal framework, he made it clear that he intended to use all available fiscal flexibility to finance priority programs. Investors interpreted this as a sign that government borrowing could ultimately exceed previous expectations.

Following these ambiguous remarks, UK government bond yields rose sharply, while the pound came under significant pressure.

It became clear that investors had begun pricing in the risk of a wider budget deficit. Even before taking office, Burnham had pledged to increase spending on healthcare, social programs, infrastructure projects, and measures aimed at reducing the cost of living. At the same time, he repeatedly stressed that no significant tax increases were planned. This naturally raised an important question: how will these initiatives be financed? The most obvious answer is through increased government borrowing, with all the associated consequences, including a larger supply of government bonds, a higher debt burden, and greater risks to the long-term sustainability of public finances.

Memories of the market turmoil triggered by Liz Truss's controversial "mini-budget" four years ago remain fresh. As a result, traders have become much more sensitive to any signs of unfunded increases in government spending.

In other words, the market had expected the new government to take an extremely cautious approach at the outset, especially since Burnham and his team had initially reassured investors that the existing fiscal framework would remain in place and that budget policy would remain broadly unchanged. However, in his first speech as Prime Minister, Burnham spoke of providing additional support for the economy and making use of fiscal flexibility. That alone was enough for investors to reassess fiscal risks and begin reducing long positions in the pound.

GBP/USD also came under additional pressure from this week's mixed UK inflation and labor market reports.

The unemployment rate remained unchanged at 4.9%, while annual wage growth excluding bonuses held steady at 3.4%, the lowest reading since late 2020. Particularly notable was the slowdown in private-sector wage growth to 2.9%, signaling weaker underlying domestic inflationary pressures. In addition, the number of job vacancies continues to decline, while employers remain cautious about hiring new staff.

The fundamental picture for sterling was further shaped by the inflation report released the following day. Headline CPI slowed to 2.6% year-on-year in June, after remaining at 2.8% for the previous two months, compared with market expectations for a decline to 2.7%. This marked the lowest annual inflation rate since March of last year. Lower fuel and food prices made the largest contribution to the slowdown.

Core CPI remained unchanged at 2.6%, while services inflation eased to 3.6%, also pointing to a gradual moderation in underlying price pressures.

Overall, this week's data give the Bank of England greater scope to maintain its wait-and-see approach. Slower wage growth reduces the risk of second-round inflationary pressures, while softer CPI data suggest that the peak in inflation may already have passed. Although the risk of renewed inflationary pressure due to higher oil prices remains, the latest economic data have significantly weakened the hawkish case for further monetary policy tightening.

As a result, the outlook for GBP/USD continues to favor sellers. However, short positions would become more attractive only after bears manage to push the pair below the 1.3360 support level (the middle Bollinger Bands line on the daily chart, which coincides with the Kijun-sen line). In that case, the next downward target would be the psychologically significant 1.3300 level.