Starmer Resigns as Oil Retreats and Inflation Nears Its Peak.
Summary
Keir Starmer resigned as Prime Minister last Monday after Andy Burnham's by-election victory, triggering a Labour leadership contest; the market reaction was muted, with much of the political risk already priced in
The Federal Reserve's preferred inflation gauge rose to its highest level since 2023 in May, though the reading predates the sharp fall in oil prices that followed the US-Iran peace deal
Oil has now fallen back close to its pre-war level, easing the inflationary pressure that has dominated markets since February and raising hopes that price growth is at or near its peak
The US jobs report has been brought forward to Thursday this week ahead of the Independence Day holiday, making it the standout release in a shortened trading week
The political drama that has gripped Westminster for weeks reached its conclusion last Monday when Keir Starmer announced his resignation, becoming the sixth UK Prime Minister to leave office in under a decade. His departure followed Andy Burnham's decisive win in the Makerfield by-election, which returned the Greater Manchester mayor to Parliament and cleared his path to a leadership bid. Markets had long anticipated the outcome, and the reaction was notably restrained. The more important development for currency markets came from an unexpected quarter, as the fall in oil prices following the US-Iran peace agreement began to reshape the inflation outlook that has driven central bank policy all year.
Sterling slipped modestly on the news of Starmer's resignation but held broadly steady, a reflection of how thoroughly the change of leadership had already been absorbed. The pound had lost around three per cent against the dollar since February as the political pressure mounted, meaning the resignation confirmed rather than surprised. Attention now turns to the leadership contest, with nominations opening on 9 July. Burnham is the clear frontrunner, and the central question for investors is whether the next leader will retain the fiscal discipline associated with Chancellor Rachel Reeves. Markets remain wary of Burnham's past policy positions, and any sign of a looser approach to borrowing could revive the pressure on gilts that drove yields to multi-decade highs in May. For now, the muted reaction suggests investors are prepared to wait for clarity rather than pre-empt it.
The dollar held firm after the Federal Reserve's preferred inflation gauge confirmed that price pressures remained elevated in May. The reading rose to its highest level since 2023, reinforcing the hawkish message delivered at the Fed's June meeting, when policymakers removed the prospect of a rate cut this year. The important caveat is timing. The data covers May and therefore predates the steep decline in oil prices that followed the peace deal, with crude now trading close to where it stood before the war began in February. That fall has yet to feed through into the official inflation figures, and several analysts believe May may prove to be the peak of the current inflation surge. This week's jobs report, brought forward to Thursday ahead of the Independence Day holiday, will be closely watched for evidence of whether the labour market is cooling enough to ease the pressure on the Fed.
The euro drew support from the European Central Bank's recent move to tighten policy, though the same fall in energy prices that is reshaping the outlook elsewhere now clouds its path. Having raised rates earlier in June for the first time since 2023, the ECB faces the question of whether a sustained decline in oil removes the justification for the further tightening that markets had begun to anticipate. Eurozone inflation data due this week will offer an early read on how quickly the energy-driven pressures are fading across the bloc. For now the single currency remains underpinned by the ECB's hawkish turn, but a clear softening in inflation would weaken the case for additional rate rises and could temper the euro's recent support.
Events to Watch This Week:
Tuesday 30 June: Eurozone flash CPI (June)
Thursday 2 July: US non-farm payrolls and unemployment rate (June)
Thursday's US jobs report is the centrepiece of a holiday-shortened week and the most significant release for currency markets, offering a fresh read on the labour market as the Federal Reserve weighs whether a rate rise will be needed later in the year. Speak to the Orbis dealing team ahead of Thursday to ensure your upcoming transfers are protected.
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