Sterling's near-term prospects look relatively upbeat as the pound consolidates recent gains, near 1.3450, as Andy Burnham became Britain's seventh prime minister in a decade with a pledge to change politics.

The currency was trading just below mid-July highs at 1.3556 and well above late-June lows in the mid-1.31s, suggesting stability near trend highs. With summer liquidity issues prevailing, sterling is likely to hover around its flattening daily cloud near 1.3420.

As the market assesses Burnham's initial moves as head of government, GBP traders and the broader FX market will stay focused on the fluid Middle East situation and its effects on oil, macro themes, and downstream UK inflation, growth and fiscal dynamics.

Fiscal concerns will also remain a focal point. While Burnham has said he will honor fiscal rules, he has set ambitious goals to tackle homelessness, while also building more public housing to help bring down welfare spending, which would help fund higher defense investment. For now, UK macro traders appear willing to give Burnham a chance. But if geopolitical ructions lift oil toward late-March highs above $100/bbl, the new prime minister may face difficult spending decisions, which will spotlight gilt yields as a fiscal sustainability barometer.

Technically, a dip below the flat 200-DMA at 1.34 would put the July 8 low at 1.3323 in sharper focus; a rise in UK 10-yr gilts above 5.2% could lead bears to target the mid-1.31s.
Sterling Chart:


(Paul Spirgel is a Reuters market analyst. The views expressed are his own)