Pound rallies on Starmer exit
Market overview
FX markets open with sterling in the spotlight, as investors look past UK political drama and instead focus on the prospect of a swift, orderly leadership transition. The pound has rallied across the board, supported by lower gilt yields and a reduced near-term political risk premium.
The wider market tone remains more cautious. Global equities are under pressure, the Fed continues to lean hawkish, and the dollar is still benefiting from resilient US data and sticky inflation risks. In Europe, softer ECB messaging has left the euro vulnerable, with EUR/USD edging closer to a potential test of 1.14.
GBP: Sterling rallies on hopes of a smooth handover
Sterling has strengthened across the board as investors take comfort from signs that the UK leadership transition could be swift and orderly.
The pound rallied after former Health Secretary Wes Streeting backed Andy Burnham, reducing the perceived risk of a drawn-out contest. UK gilt yields moved lower, while sterling posted its strongest daily gain against the euro in more than a month.
Keir Starmer is expected to remain in office during the transition. Nominations for his successor open on 9 July, with any contest set to conclude by 1 September. For now, markets are treating this as a reduction in political risk, although that calm may prove temporary.
Burnham has previously unsettled investors with comments viewed as challenging fiscal orthodoxy and the UK’s fiscal rules. Any renewed concern over the fiscal direction of a future Burnham government could quickly rebuild the political risk premium.
The timing is symbolically important, coming on the tenth anniversary of the Brexit referendum. A decade on, sterling still carries the legacy of that vote. Brexit did not break the pound, but it changed how it trades. GBP now sits on a lower structural base, reacts more sharply to global risk sentiment and commands a higher hedging premium.
For investors, the question is no longer whether Brexit weakens sterling further. The key point is that sterling has become a more volatile, risk-sensitive currency shaped by the long-term consequences of the post-Brexit era.
USD: Dollar momentum remains intact
The dollar remains well supported, with the dollar index more than 2% higher month-to-date and on course for one of its strongest monthly performances of the past year.
Geopolitical headlines continue to influence sentiment, although markets appear less reactive to each twist in the Middle East. The reopening of the Strait of Hormuz and last week’s memorandum of understanding have improved the near-term picture, but investors remain cautious after repeated setbacks.
The bigger driver is still policy. The latest Fed meeting reinforced the higher-for-longer narrative, with Chair Warsh prioritising price stability and keeping policy firmly data dependent. Strong retail sales, a resilient labour market and persistent price pressures all support the case for restrictive rates to remain in place.
Oil’s pullback does not remove the inflation risk. Energy shocks can feed into transport, supply chains and services prices with a lag, keeping the inflation debate alive.
Near term, month-end, quarter-end and half-year rebalancing flows, alongside sizeable options expiries, may create noise and slow further dollar gains. Even so, the macro backdrop remains dollar supportive.
EUR: ECB caution leaves euro exposed
EUR/USD remains under pressure and looks increasingly vulnerable to a break below 1.14.
The latest leg lower followed ECB President Christine Lagarde’s pushback against expectations of a stronger policy response to the Middle East conflict. Her tone contrasted with the more hawkish signals from Chief Economist Philip Lane and other policymakers last week, prompting German yields and the euro to move lower.
The rates channel is now doing more of the heavy lifting for EUR/USD. A hawkish Fed is supporting the dollar, while softer ECB communication is adding to euro weakness.
That said, the downside may be less severe than earlier in the conflict. Progress in US-Iran negotiations has helped unwind part of the eurozone’s terms-of-trade shock, with energy prices easing from recent highs and reducing pressure on the region’s growth outlook.
Looking ahead
Eurozone, UK and US PMI releases will be the main data focus today.
Markets will assess whether survey data confirm resilient US momentum and softer European activity.
Month-end, quarter-end and half-year rebalancing flows could distort FX price action.
Large options expiries may limit clean directional moves in the dollar.
UK political headlines remain important for sterling, particularly any signals on fiscal policy under a potential Burnham government.