Last week it was about poor local election results. This week it’s the possibility of a leadership challenge. UK political turmoil continues to weigh on the pound
The pound slumped against the dollar last week, posting a loss of more than 2%. That’s the largest weekly fall since November 2024. Sterling’s struggles can be laid squarely at the door of 10 Downing Street, where Prime Minister Keir Starmer is now widely expected to face a leadership challenge later this year. At the moment, markets think his most likely successor is Andy Burnham, the mayor of Greater Manchester. Burnham is considered less market-friendly than Starmer, putting pressure on the pound.
The pound also fell against the euro, though less dramatically. For its part, the euro also struggled against the dollar, heading towards a 1% loss by the end of the week.
Iran overshadows everything
National politics aside, the conflict in the Middle East continues to exert huge pressure on economies and markets. Investors were troubled last week by President Trump’s assertion that the US doesn’t need the Strait of Hormuz to be open.
The continued closure of one of global trade’s most important waterways is driving inflationary pressures around the world. Investors are now pricing in three interest rate hikes by the European Central Bank (ECB), and either two or three by the Bank of England (BoE). Interest rates impact exchange rates and cause money market fluctuations.
The week ahead
The situation in the Middle East will continue to focus minds, but investors will also have their attentions turned to AI this week. Nvidia, the company that makes most of the chips driving the AI revolution, will report first quarter earnings on Wednesday. AI’s huge importance to the US and global economies mean the results will be closely analysed.
Elsewhere, Thursday’s S&P Global flash PMI (PMIs are snapshots of economic sentiment) will highlight the state of US private sector confidence, with impacts from the Iran war beginning to feed in. In Europe, manufacturing and service PMIs (Thursday) and the eurozone trade balance (Tuesday) will be closely watched, while inflation data will take centre stage in the UK (Wednesday).
