Pound firmer amid UK political drama
While there was plenty of high political drama in the UK yesterday, the response in markets was relatively muted. As had been flagged over the weekend, Keir Starmer announced that he was stepping down as Labour Party leader and Prime Minister, and looks set to be succeeded unopposed by Andy Burnham after would-be leadership contender Wes Streeting declared he was stepping aside in favour of Burnham. This has led to speculation that Streeting may get the job of Chanceller in a new government, which would probably find favour with markets. With the uncertainty of a drawn-out leadership contest out of the way (it seems), the pound regained some ground against both the euro and the dollar. It is trading at around £0.8630 versus the single currency this morning, having closed out last week at about £0.8670, and at circa $1.3250 versus the dollar, after briefly dipping below the $1.32 level early yesterday morning. Meanwhile, the euro has lost further ground to the dollar after comments by ECB President Lagarde prompted some paring back of rate hike expectations. It is trading at around $1.1435, not far shy of its year-to-date low of circa £1.1410.
US short-dated government bond yields backed up further yesterday, extending the increase set in train by last Wednesday’s hawkish Fed meeting, with 2-year yields rising by around 5bps, while 10-year yields were also around 5bps higher, closing at just over 4.5%. German and UK yields were both lower, falling by around 3-5bps, with UK bonds marginally outperforming on the day. Yields generally are nudging lower this morning amid a further fall in oil prices (as US VP Vance hails good progress in the talks with Iran) and weak equity markets. Asian stocks were a good deal lower overnight, led by a 10% fall in South Korea’s KOSPI index, which will weigh on European and US stocks today.
In remarks yesterday, ECB President Christine Lagarde said the energy price “shock is too large to look through without jeopardising our (inflation) target” – hence the 25bps rate hike earlier this month – but she added that “we see no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful (monetary) policy response.” The latter provided some reassurance for markets, which pared back expectations for further tightening over the remainder of this year (to about 30bps or so).
For the day ahead, flash PMIs for June are due in the Euro area, UK and the US. They will provide an update on how the main economies are faring in the face of the energy price shock triggered by the war in Iran. A number of ECB and BoE members are scheduled to speak over the course of the day.