Poor local election results for the governing Labour party could have repercussions for money markets
In the UK, last week’s local elections saw the governing Labour party lose a swathe of seats to rivals on the right and left. Markets were initially calmed by Prime Minister Keir Starmer’s insistence that he would stay in office despite criticism, but over the weekend many Labour MPs called on him to quit. A period of political instability during a time of global turbulence could rock markets and cause currency volatility for the pound. As MPs return to Westminster on Monday, this is one to watch.
Despite Labour’s bruising night, the pound climbed to its highest level against the dollar for several months at the end of last week, with investors still pricing in two Bank of England (BoE) interest rate hikes by the year’s end. The euro also gained against its US counterpart as a tense ceasefire in the Middle East just about held. Markets are now expecting an interest rate rise by the European Central Bank (ECB) as early as next month.
US consumers uneasy
According to the University of Michigan’s respected Consumer Sentiment Index, US consumer confidence is at a record low. Petrol prices, tariffs and the war in the Middle East are all weighing on sentiment, with many consumers hoping for an early end to the conflict.
The price of Brent Crude oil remained at over $100 a barrel on Friday despite falls earlier in the week. The fragile peace between the US and Iran looked to be faltering as the countries traded strikes and rancour over the status of the Strait of Hormuz, though President Trump claimed the ceasefire was holding. A return to all-out conflict would escalate inflationary pressures and see traders rushing to safe-haven assets like the dollar.
The week ahead
The Middle East conflict aside, the main focus of the week in the US will be on the likely confirmation of Kevin Warsh as Federal Reserve (Fed) chairman. Traders will be looking for clues as to how quickly Warsh might be prepared to instigate a rate cutting agenda.
Elsewhere, important data this week includes April’s inflation rate in the US (Tuesday) which is expected to show prices accelerating due to higher energy costs. In Europe, markets will be looking at first quarter GDP figures in the UK (Thursday) and the EU (Wednesday), and industrial production in the eurozone (Wednesday).
