The dollar recovered strongly last week and starts this week close to a one-year high, while sterling has come under fresh pressure after Keir Starmer announced his resignation as Prime Minister. The pound slipped around 0.3% against the dollar on Monday morning, trading near a three-month low, as investors weighed the prospect of an Andy Burnham premiership and what it could mean for UK fiscal policy. The euro was also weaker against the dollar, but steadier against sterling.
After the US and Iran announced progress towards a deal to reopen the Strait of Hormuz last week, reduced safe-haven demand put the dollar under pressure and briefly supported both sterling and the euro, but that quickly faded as doubts grew over whether any agreement would hold. Oil prices have continued to fall, however, with Brent crude down 8% over last week and dropping another 2% this morning, suggesting markets still see progress going forward.
The first-round of high-level talks concluded with some progress, with mediators saying the two sides have agreed a roadmap towards a final deal within 60 days. However, the status of shipping through the strait remains unclear, and Iran has suggested a mechanism to control passage through the waterway. The key issue for FX markets is energy risk. If shipping through the Strait of Hormuz normalises, lower oil prices should ease inflation concerns and reduce support for the dollar. But if tensions flare again, the dollar is likely to benefit from renewed safe-haven demand, while sterling and the euro could come under pressure because the UK and eurozone are more exposed to imported energy costs.
The dollar’s recovery from early-week losses was also helped by the Federal Reserve holding interest rates at 3.50%-3.75% and stronger-than-expected retail sales, which added to the impression of economic resilience. Newly appointed Chair Kevin Warsh led a hawkish meeting, signalling potential interest rate hikes later this year.
Sterling was more fragile. The pound fell around 1.2% against the dollar last week after the Bank of England held rates at 3.75% and softer-than-expected inflation data reduced expectations for further UK rate rises. Friday’s stronger retail sales (up 1.2% in May) offered some support, but the pound remains more vulnerable than the euro. The single currency has been steadier against sterling, helped by the European Central Bank’s recent rate hike and expectations that eurozone policy will remain relatively tight. Both currencies remain vulnerable if Middle East uncertainty revives safe-haven demand for the dollar.
UK political shift weighs on sterling
Keir Starmer’s resignation has added a fresh layer of political risk for sterling. The Prime Minister said on Monday that he will stand down, with a successor expected to be in place by the time Parliament returns in September. Markets had already moved to price in a leadership change, with the pound slipping around 0.3% against the dollar and trading near a three-month low.
The immediate reaction has been contained, but investors are now focused on the transition to a likely Andy Burnham premiership and what it could mean for fiscal policy. The key concern for FX markets is whether a new government signals looser spending plans at a time when UK borrowing costs are already elevated. Any perception of weaker fiscal discipline could quickly feed through into higher gilt yields, renewed pressure on the pound and greater volatility in GBP/USD and EUR/GBP.
The week ahead
Monday will be dominated by market reaction to Keir Starmer’s resignation, the likely path to an Andy Burnham premiership, and weekend developments around the on-off agreement between the US and Iran. ECB President Christine Lagarde also speaks, while eurozone consumer confidence is released. Tuesday’s Flash Purchasing Managers’ Index (PMI) releases for June will be the focal point for the dollar, euro, and pound, revealing how private-sector business activity is holding up under persistent global energy uncertainty. Wednesday’s focus will be Germany’s Ifo business climate index and US new home sales.
Thursday is the key data day. The US releases May PCE inflation, the Fed’s preferred price measure, alongside personal income and spending, durable goods orders, weekly jobless claims and the final estimate of first-quarter GDP. The UK also gets the CBI distributive trades survey.
Friday brings US wholesale inventories and the final University of Michigan consumer sentiment reading.
