Credit Agricole CIB Research discusses GBP outlook in light of the recent UK political developments.

"Labour Party’s Andrew Burnham won  the Makerfield election last night and can now return to the House of Commons to  launch his leadership bid. We have recently analysed the GBP market impact from  a potential Labour Party leadership contest and concluded that a PM Burnham  could be the most damaging outcome due to the economic and fiscal effects of his  policy agenda. Ahead of the by-election, market betting odds have already moved  firmly in favour of a Burnham victory, suggesting that some negatives are already  in the price. Furthermore, the UK CDS credit spread has recently hit a three-month low, further signalling that gilt investors expect bond vigilantes to be able to instil  ‘fiscal discipline’ on any future government," CACIB notes.

"The above being said, FX investors may be complacent about the extent to which  a PM Burnham would go in pursuit of his policy objectives. We worry that, at least  initially, he may antagonise bond market vigilantes as he implements his fiscal  policy agenda. We therefore believe that a potential victory for Burnham would  force FX investors to shift their attention to the looming political risks and their  negative fiscal and economic consequences," CACIB adds,