Key Takeaways

• Sterling at 3-month low: The pound languished near its lowest level since late March against the dollar and hit one-month lows against the euro.
• Starmer’s exit the catalyst: The prime minister’s resignation announcement sent the currency into a tailspin.
• Burnham’s victory triggered the crisis: Andy Burnham’s decisive parliamentary by-election win effectively cornered Starmer and forced a summer leadership contest.
• Leadership void until September: The contest won’t be settled until Parliament returns in September — a prolonged period of political uncertainty.
• Chancellor pick the key test: Markets will search for fiscal continuity reassurances from Starmer’s successor and a new chancellor committed to the fiscal rule.
• Dollar near multi-month highs: The DXY held around 100.9 following last week’s hawkish Fed meeting.
• Rate repricing accelerates: OCBC notes markets are now pricing roughly 40 basis points of additional Fed tightening by year-end — up from 20 basis points a week ago.
• Euro slips: EUR/USD edged lower to $1.146 as policy divergence between the ECB and Fed widens.
• Iran talks provide some relief: Progress in Switzerland quadrilateral talks eased concerns about renewed Middle East flare-ups.
• Technical talks continue: The U.S. and Iran are set to resume discussions on their 14-point MOU this week.

The British pound traded at near three-month lows on Monday after Prime Minister Keir Starmer threw Downing Street into a tailspin by announcing his resignation.

The political shockwave in London left the greenback hovering near multi-month highs as traders doubled down on a hawkish Federal Reserve outlook.

Sterling languished near its lowest level since late March against the dollar and wallowed at one-month lows against the euro.

Political Vacuum Opens Under Sterling

The currency’s slide began in earnest after internal rival Andy Burnham secured a pivotal parliamentary election victory, effectively cornering Starmer and forcing a summer leadership contest that won’t be settled until Parliament returns in September.

Starmer’s exit strips away the hard-fought political stability that had recently underpinned the British pound, leaving the currency exposed to a summer of political horse-trading. While markets are currently giving Andy Burnham the benefit of the doubt, sterling’s resilience remains fragile.

Dollar Supported by Hawkish Fed Repricing

The dollar index held around the 100.9 level after last week’s Federal Reserve meeting prompted markets to sharply scale back expectations for near-term rate cuts. The greenback was also supported by elevated Treasury yields, with investors increasingly betting that U.S. borrowing costs will remain higher for longer.

Analysts at OCBC said markets have shifted from “oil relief to Fed pressure” in recent sessions, with the dollar drawing support from a sharp repricing in interest rate expectations.

The bank noted that markets are now pricing in roughly 40 basis points of additional Fed tightening by year-end — up from around 20 basis points a week ago — underscoring growing conviction that policymakers will maintain a restrictive stance on inflation.

Iran Progress Offers Modest Relief

Sentiment improved somewhat after Iranian officials flagged progress in quadrilateral talks with the United States in Switzerland over the weekend, helping calm concerns over renewed Middle East tensions after President Donald Trump threatened fresh military action against Tehran.

The United States and Iran are set to continue technical discussions over their 14-point memorandum of understanding this week, Pakistani and Qatari mediators said.

The dollar’s strength was evident across major developed-market currencies. The euro edged lower to $1.146 as traders assessed the widening policy divergence between the European Central Bank and the Federal Reserve.

Beyond geopolitics, focus this week is squarely on key U.S. economic data — chiefly PCE inflation figures, which are expected to provide more cues on the path of interest rates and serve as the Fed’s preferred inflation gauge.