Sunset Market Commentary – ActionForex

Markets

UK Prime Minister Keir Starmer announced to step down as leader of the Labour Party and Prime Minister. After his party lost big in the early May elections, the UK PM faced ever further erosion of political backing within his party. Last week, the main challenger to become PM, Andy Burnham, in a by-election obtained the Lower House seat necessary to formally start the procedure. PM Starmer took the inevitable conclusion. He today asked the party to open the nomination procedure for a new leadership with candidacies to be made between 9 and 16 July. However, chances for such a contest have declined substantially as one of the main opponents to rival Burnham, former health Secretary Wes Streeting, already gave his support to Burnham. In case of no contest, Burnham can be PM mid next month. The market reaction to the expected leadership change is benign even as Burnham initially was seen as open to more spending and potentially a less strict fiscal framework. UK yields after some volatility around Starmer’s announcement even ease 4-5 bps. Sterling also reacts orderly, even constructive. After trading in the 0.8680 area early this morning, sterling returned to the EUR/GBP 0.863 area. Maybe markets draw some comfort that in case of no formal contest, chances/risks have declined for candidates to make ‘costly promises’. We don’t draw firm conclusions yet. The new UK PM anyway will face the same fiscal limits and market scrutiny as was the case for his predecessor.

US and EMU yields today show a divergent picture. US yield markets after being closed on Friday, gain 3-4 bps to at least partially catch up with Friday’s rise in the EA. German yields at the same time are easing 4.5-2.5 bps in what we basically see as technically inspired trading. ECB president Lagarde before the EU Parliament repeated that more forceful action currently isn’t needed and that the Bank is confident that inflation will return to target with appropriate monetary policy action. Headlines from the negotiations between the US and Iran give no clear market guidance. After a flaring up of tensions during the weekend (comments from President Trump; ongoing attacks between Israel and Hezbollah in Lebanon) Brent oil briefly jumped to $82 p/b just to ease back to currently at <$79 p/b as Iran indicated that mediators Qatar and Pakistan had facilitated ‘major progress’ in the talks. European equities show modest gains (EuroStoxx 50 +0.4%) US indices open little changed (S&P 500 +0.2%). Also no outsized moves in the major USD cross rates. At EUR/USD 1.143 and DXY 101, the US currency quite easily holds last week’s gain as markets assess concrete Fed action as the MPC statement said it will deliver on its price stability mandate.

News & Views

A batch of Polish economic data for May largely surprised to the downside today and kept the zloty in the defensive, including against regional peers (CZK, HUF). EUR/PLN rose towards 4.27, on track for the highest close since early-April. Polish swap yields lose over 3 bps across the curve. Even so, money markets keep erring (slightly) to the side of policy rate hikes rather than cuts. Retail sales grew 4.4% y/y last month, up from 2.8% in April but well short of the 6.7% expected. Corrected for inflation, sales dropped 1.7% on a monthly basis (vs -0.9% consensus) coming after an 0.8% drop in April. Wages fell by 3.8% m/m, pulling up the annual reading from April’s five-year low (of 5.4%) to a less than anticipated 5.8%. Labour market data printed more or less in line with consensus but offered little reasons to cheer. Employment dropped 0.1% m/m (-0.9% y/y). In the past two years, monthly employment effectively grew on just three occasions. PPI inflation flatlined in May, undershooting views of a 0.3% increase.

Canadian inflation rose by a more-than-expected 1% m/m in May, pushing up the yearly figure from 2.8% to 3.2%. That’s the quickest pace since December 2023 and above the 1-3% target range of the BOC. Higher prices for gasoline (33.2% y/y) continued to drive the acceleration. But even without that, CPI still quickened from 2% to 2.2% in May, Statistics Canada said. Core inflation excluding food and energy rose 1.6% vs 1.5% in April. The BoC’s preferred gauge, trimmed mean core CPI, matched April’s near five-and-half-year low of 2%. Today’s numbers were in line with to slightly above expectations. The Canadian dollar marginally strengthens to USD/CAD 1.416. The pair was nearing the 1.42 mark earlier in the day, a level last seen in April 2025. The Bank of Canada at the June meeting showed little hurry to react to the current inflation uptick, citing the trend of underlying inflation and the view that the economy is operating below potential. Canadian money markets price a 70% chance for hike end-2026.