UK Prime Minister Keir Starmer is reportedly preparing to announce his departure plans as early as today, following significant pressure after Labour's recent local election losses. Allies believe this move could pave the way for Andy Burnham, recently elected to Parliament, to challenge for party leadership. This political uncertainty has contributed to the pound trading near this year's low, with sterling weakening $0.0024 to trade at $1.32055 against the dollar. The pound has lost approximately 3% since February when pressure on Starmer began to mount, and options markets indicate traders are bracing for increased volatility in the coming weeks.
Simultaneously, the US and Iran have made progress in peace talks, extending a ceasefire from April for at least another 60 days. This comes despite initial tensions over Iran's earlier announcement that it had closed the Strait of Hormuz, which caused shipping traffic to slow significantly on Sunday. However, both Qatar and Iran have since indicated that ground has been laid for further negotiations, with Iran's Foreign Minister stating that the blockade of the Strait has been lifted and some frozen assets released, alongside a new reconstruction plan for Iran.
Previously, President Donald Trump had threatened to restart war in the Middle East if Iran's proxies continued to cause trouble in Lebanon, further roiling oil markets with Brent crude futures climbing 1.30% to $81.62 a barrel after the Strait closure. However, with the reported progress in peace talks, crude prices have since dropped. The dollar remained firm on Monday, while the euro softened 0.1% to $1.1462. The Japanese yen slipped to 161.53 per dollar, near a two-year low, and US 2-year Treasury yields rose to their highest since early 2025 at 4.2276%, as traders anticipate 43 basis points of rate hikes this year.
The potential leadership change in the UK is a key focus for investors, particularly regarding Andy Burnham's views on fiscal policy. While Burnham has stated he would respect existing fiscal rules, analysts like Nomura economist George Buckley highlight that his approach and choice of Chancellor will be crucial. Concerns about the UK's high debt and interest payments, coupled with political instability, have made investors wary of gilts, which already have yields around 4.85%, close to their highest since the 2008 financial crisis. Jefferies strategist Mohit Kumar noted the difficulty in finding additional spending money without counterproductive tax rises or unrealistic efficiency savings, maintaining a cautious outlook on UK gilts and sterling.
