An expected Starmer exit puts sterling in the spotlight
A strong dollar drove DXY near 101, while the euro weakened and sterling hovered above 1.32 amid rising UK political uncertainty over Starmer’s expected exit and fiscal concerns.
USD
Friday was a thin, holiday-curtailed session, with many US desks shut for Juneteenth, but it set the seal on a commanding week for the dollar. The DXY held near 100.8, having peaked above 101 earlier in the session, its highest since May 2025, to close the week up around 1%. As we argued after Wednesday's FOMC, the move owes more to how the market read Chair Warsh's debut than to its substance: the decision to scrap forward guidance was taken as hawkish, and with roughly half of policymakers now pencilling a 2026 hike, swaps close to fully pricing a September move as of this morning. We continue to view that repricing as premature and lean towards no change. The greenback is marginally softer this morning but retains a safe-haven bid, with Middle East headlines over the weekend doing little to build further confidence in the ongoing negotiation process. With the US calendar light early on this week, Middle East headlines and intervention risk around USDJPY, still above 161, will set the tone for the buck. Meanwhile, UK politics will also garner some attention, with a speech from PM Starmer setting out a timetable for his exit also expected this morning.
EUR
The euro spent the week on the back foot, sliding to multi-day lows in the mid-1.14s on Friday as broad dollar strength did the damage; a procession of ECB speakers, President Lagarde among them, barely moved the dial. That extended the break below the 1.15–1.16 band we had expected to hold. The domestic picture remains unchanged: the ECB lifted its deposit rate to 2.25% earlier in the month, and markets still lean towards a further hike by September. Yet staff projections of 3% average inflation this year against growth trimmed to 0.8%, underlining how little room soft activity leaves the single currency. We think the medium-term case is a little more constructive for the euro, anticipating a reopened Strait of Hormuz, which would ease the bloc's terms-of-trade squeeze. But Iran's weekend reclosure of the waterway puts that thesis on hold for the time being. Today's domestic diary is bare, leaving EURUSD hostage to the dollar; tomorrow's flash PMIs are the week's first real test of how the energy shock is feeding through to activity.
GBP
The pound spent Friday just above 1.32, even as a stronger-than-forecast 1.2% rise in May retail sales offered fleeting support. Rather, domestic political risk remains front of mind after Andy Burnham won the Makerfield by-election on Friday - he is due to be sworn in as an MP today. This sets the stage for an almost certain end to PM Keir Starmer’s premiership, though how exactly this comes about remains to be seen. Reports this morning suggest an announcement by Downing Street is likely in the next few hours, with Starmer setting out a timetable for his departure. Given the political uncertainties, especially around fiscal policy, we remain biased toward GBP downside. Changing the person in charge does nothing to solve the UK’s fiscal challenges, and we are yet to hear anything from Burnham that convinces us that he has a more credible plan than the current government. That said, much of sterling’s near-term fortunes will rest on the identity of the next Chancellor, with Wes Streeting one possible name that could come as a relief to both gilts and the pound.
CAD
The loonie was the week's weakest major, with USDCAD pushing further above 1.41 heading into the weekend. Two forces drove it: broad post-Fed dollar strength and a near-10% weekly slide in crude as the initial reopening of the Strait of Hormuz drained the war premium, taking WTI to its lowest since early March. Friday's April retail sales offered little help, rising 0.5% but with a core measure 0.7% below consensus, pointing to subdued underlying demand. As we have noted, a credible reopening eases the haven dollar but caps loonie upside via softer oil, and the terms-of-trade drag won out, with lingering USMCA uncertainty as an added weight. The weekend has muddied that picture: Iran's reclosure of the Strait has nudged crude back towards $77, lending the loonie marginal support without dispelling the risk-off bias that favours the dollar. Focus now turns domestic, with May CPI due this afternoon on refreshed basket weights. We look for headline firmness on energy but a contained core, leaving USDCAD holding its gains above 1.41.