The desk views the recent announcements from new UK Prime Minister Andy Burnham as pivotal for the short-term trajectory of the British economy and the British pound. Specifically, the proposed VAT cuts on electricity and bus fare caps represent direct fiscal stimuli aimed at alleviating household cost burdens, potentially bolstering consumer sentiment and spending in an increasingly resilient economic landscape. Per the full note from MUFG EMEA, notable data points, such as a headline inflation decrease to 2.6%, indicate an easing pressure on consumers, which could contribute to a more stable macroeconomic environment. The ongoing economic rebound, complemented by favorable retail sales and improving business sentiment, suggests a supportive backdrop for GBP positioning among traders.
What the desk is arguing
The desk is positioned on the view that Burnham's fiscal measures will likely create upward pressure on the pound, particularly as inflation continues its downward trend. The latest inflation rate being the lowest in months reinforces the notion of steadying economic conditions, which ultimately bolsters the appeal of GBP in the FX space. This development arrives amid a broader resurgence of confidence in the UK economy.
Furthermore, the resilience showcased in retail sales and consumer sentiment surveys could enhance the forward-looking outlook for the Bank of England's stance on interest rates, potentially influencing GBP valuations positively in the upcoming sessions.
Where it sits in our coverage
Our consensus target for GBP/USD is currently set at 1.075, with a range that extends from a low of 1.04 to a high of 1.12. The projections from major financial institutions illustrate this divergence in outlook: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
The desk's analysis aligns closely with jpmorgan's target, standing near the upper bound of the expected trading range, reinforcing a bullish perspective on GBP as economic conditions appear to stabilize.
How other firms see it
The positive shift in sentiment towards GBP is mirrored by firms like jpmorgan, which support a stronger outlook for the currency based on similar findings of macroeconomic resilience. Conversely, bofa offers a more cautious stance, indicating a potential for GBP weakness amidst ongoing economic challenges.
Traders should also keep an eye on pivotal indicators such as UK inflation reports and consumer spending data, which could reflect the impact of Burnham's policies on market dynamics moving forward.
What the calendar says
At this juncture, there are no imminent high-impact events scheduled that could catalyze volatility in GBP markets. As such, traders are advised to monitor emerging data closely, especially those related to UK inflation and retail sales figures in the coming weeks.
01New UK PM Burnham's fiscal policies aim to alleviate cost of living pressures.
02Inflation has decreased to 2.6%, suggesting easing economic pressures.
03Retail sales and consumer sentiment are improving, bolstering GDP outlook.
Market implications
Traders should watch for a rally in GBP as the economic indicators reflect positively on consumer sentiment and spending. Key resistance levels may be approaching near the upper ends of the trading range at approximately 1.075, pivotal for maintaining bullish sentiment on the pound.
Risks to this view
Any reversal in the current positive trend could stem from surprising economic data that contradicts the recovery narrative, such as an unexpected uptick in inflation or disappointing retail sales figures, which may pressure GBP downward.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Henry Cook, Senior Economist at MUFG. It's Friday, 24th July 2026, and joining Henry to post some questions on the financial market themes for the week ahead is Elizabeth Wren, European Political Analyst. This podcast is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hello, my name is Elizabeth Wren.
I'm European Political Analyst at MUFG's Economic Research Office and I'm joined today by Henry Cook, Senior Economist at our Global Markets Research Team. Hello. Henry, let's talk about the UK today.
So, Andy Burnham became the new Prime Minister on Monday and he's had a busy start. He's already announced some policy changes with the introduction of VAT cut on domestic electricity consumption and there's a cap on bus fares in England as part of his efforts to address cost of living pressures. What sort of impact do you think this will have on the UK economy and what sort of position is the UK economy in right now?
Yeah, he's certainly been busy. I think the public have been somewhat receptive to change in leadership and Burnham is going to hope to kind of at least maintain that sort of momentum. I think from my perspective, it's worth flagging that there's been plenty of positive news on the kind of UK macroeconomic data from this week.
Headline inflation in the UK fell to 2.6%. That was the lowest since March. It was the third downside surprise in a row.
We've also seen business and consumer surveys improving in July as well. And this morning's latest retail sales numbers, they were pretty good on top of that. So, yeah, it's all looking okay.
So, you'd say that the UK economy is in a relatively resilient position right now? Yeah, yeah. I think the numbers are encouraging, but these are always backward looking, right?
The geopolitical situation has certainly worsened this week. That could challenge that narrative of resilience. We've had significant re-escalation in the Middle East.
I think it's been 13 consecutive nights of US attacks on Iranian targets. The forces have started attacking shipping in the Red Sea as well. There's been very little sign of any diplomatic progress.
And yeah, we're seeing quite a strong market reaction to this in energy pricing, and in particular Brent oil, it's been moving above $100 a barrel in response. There are kind of concerns here that we're moving into this period of re-escalation with much less in the way of inventory buffers than we had before. And so, prices might prove to be kind of relatively sticky at higher levels.
That sounds quite significant for inflation. Yes, yes. I mean, European natural gas prices have reached year-to-date highs as well.
Storage buffers are becoming a bit of a concern. And I think if this is maintained, then the kind of modest disinflationary effect of Burnham's VAT cut, which you mentioned, that will be completely overshadowed by the increase in the kind of in the household energy price cap from October. And yeah, other energy effects that they'll continue to pass through less directly.
And as a result, we're tracking UK headline inflation reaching 3.5% this autumn as it stands. So, around a whole percentage point higher from where we are now in the latest data. It's quite a significant increase in inflation coming down the track for the UK economy.
So, what do you think this means for the Bank of England and the upcoming policy meeting next week? Yeah, I mean, rising energy prices certainly make life harder for the Bank of England. As I said earlier, there has been that good news on UK inflation recently.
The numbers have come in lower than expected. Despite the general resilience of the economy, UK labour market numbers have looked a little bit soft as well. And the survey data, it shows limited sign of broadening inflation pressures beyond direct energy effects still.
The Bank of England, they haven't shown much urgency to raise rates. We don't expect any change in policy next week. But if energy pricing is maintained around current levels, I think the argument for a more proactive approach that would certainly be strengthened.
And there are hawkish risks to our current pool, which is that policy rates will be left unchanged this year. Looking at cross-market pricing, I think investors are kind of increasingly pricing in the prospect of a September rate hike from the Bank of England. So, not least meeting the next policy meeting in September.
Let's see how they frame it next week. I think, from my perspective, I think there is an argument to wait until November before making a decision. That meeting in the autumn will come with fresh projections.
There will be a better sense of what annual pay settlements might look like in 2027. And also, I think the Bank of England will have more visibility on Burnham's fiscal policy around the autumn budget. I think the Bank of England, they will be quite wary of any regulatory changes which could add to inflationary pressures for the UK economy.
So, on the budget and the fiscal story, at the start of the week, we had confirmation that Burnham had picked John Healey as his councillor, rather than Shaban Mahmood. And they reportedly have quite similar profiles, quite orthodox and moderate. I suppose the main difference is that Healey was the defence minister under Starmer, but resigned after claiming he was not getting enough fiscal backing.
So, what do you think his position as chancellor means for defence spending? Yeah, he must have had some assurances from Burnham in that regard, I think. I think we can assume that UK defence spending will increase fairly significantly, probably to around 3% of GDP or higher over coming years.
And yeah, I guess beyond defence, Burnham has set out quite an extensive policy platform. We're still waiting for the details in many areas. As you said, we've had some measures on cost of living pressures.
Beyond that, we know roughly what he's going to focus on. I guess, first of all, we know he's going to give more powers to local authorities. Yeah, he's spoken about working more closely with regional mayors, for instance.
Yeah, yeah, indeed. As you might expect from the ex-mayor of Manchester, he's also talked about a kind of big house building programme, greater public oversight of utilities, a more active industrial strategy. We're waiting for details on many of these things.
I think he is still kind of fleshing it out. But I guess the general overall approach has been described as business friendly socialism. And I think we can expect Burnham will be more interventionist, will be more left leaning as a prime minister than Starmer was.
How likely is it, do you think, he can implement these sorts of policies? Yeah, look, I mean, Burnham and his government, they'll certainly be constrained by the commitment to keeping the current UK fiscal rules. That's a big constraint.
And the other constraint is Labour's manifesto pledges ahead of the last general election. These promised that there wouldn't be any changes to the main sources of tax revenues, income tax, national insurance, corporation tax, or BAT. I think my general sense is that Burnham is going to probe away at the kind of limits of these constraints and see how far he can get to implement his policy platform.
I think he's conscious of the need to avoid destabilising markets here. The sort of Liz Truss experience is a cautionary tale. And yeah, it's a narrow path.
I think, well, on my current estimate, I think the headroom for the new chancellor for Healey has probably been cut in half by higher borrowing costs. Significantly, this week, Burnham said that he would try to find flexibility and that comment unsettled markets a bit. There's not a great deal of flexibility there.
Maybe on the CapEx side, it is possible to carve out a bit more space for investment under the current fiscal rules. But ultimately, borrowing is borrowing and investor sentiment will remain a constraint, I think, for Andy Burnham. I guess stepping back the baseline for us is that we expect to see modest tax rises in the autumn and a bit more debt issuance to support kind of a modest, moderate increase in spending.
But yeah, it's a narrow path. And I think markets will remain sensitive to any suggestion that the government is pushing things too far. That's interesting.
So, it sounds like the budget will certainly be a key event again on the UK calendar. Let's leave it there for today. Thank you for joining us on the podcast and thank you very much to Henry for sharing your views.
Thanks for having me. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe and contact your MUFG sales rep for more information.
Come back next week for more insights from the Global Markets Research Team.