Sterling weakens amid UK political drama

There’s heightened political drama in the UK as Prime Minister Keir Starmer comes under pressure to step down following last week’s elections results. A number of junior members of government have resigned and some senor cabinet members have reportedly advised the PM to set out a timeline for his departure. Not surprisingly, the pound is on the back foot, albeit only marginally so for now, trading at around $1.3530 against the dollar and at about £0.8680 against the euro. UK bonds are bearing the brunt of the latest political developments with yields heading a good bit higher (+10bps) at the start of play today. Meanwhile, Donald Trump has said the US-Iran ceasefire is on “life support”, which is keeping oil prices elevated and bond markets in particular unsettled. The euro continues to edge down against the dollar, trading at around $1.1750 this morning.

Government bond yields increased in tandem with rising oil prices, with US and German yields ending about 4-6bps higher on the day. UK bonds underperformed – partly related to political developments – yields rising by 8-10bps across the curve. Equity markets had a mixed session. US stocks continued to move ahead, chalking up modest gains (though enough for the S&P 500 to close at a new record high), while European indices ended marginally in the red.

Outgoing ECB vice -president De Guindos says “his impression is that the data on (Euro area) growth over the coming weeks are not going to be good”. He notes that “an energy shock is usually reflected in inflation indicators much more rapidly than in growth indicators,” adding that “we need more clarity about the conflict in Iran…before deciding on the next interest rate move.”

According to the consensus forecast for today’s CPI data in the US, headline inflation is expected to have accelerated further to 3.7% in April, from 3.3% in March and 2.4% in February, reflecting the impact of higher energy prices. Core inflation – which excludes energy as well as food prices – is seen edging up to 2.7%, from 2.6% in March and 2.5% in February. Other US data scheduled for today include the small business optimism index for April and the latest ADP weekly employment report, while elsewhere, the ZEW economic sentiment index is due in Germany.