For Pound Sterling, Bad Politics is Back

Economic

Summary:

The British Pound will find that politics is becoming a headwind again.

The governing party doesn't have the mandate from its parliamentarians to bring spending under control.

This is the message markets are receiving as they parse headlines that warn Prime Minister Keir Starmer is on the cusp of a major rebellion from his own parliamentarians over his attempts to get a grip on the country's balooning welfare spending.

Labour Party MPs are unhappy about his plans to reform elements of the welfare system, and warn they could vote against Starmer's key legislation later today unless he makes fresh concessions.

The rebellion comes despite the significant retreat Starmer has already made to MPs. Debbie Abrahams, one of three senior Labour MPs who negotiated last week's partial u-turn on benefits cuts, said the final details of the Bill did not tally with what had been agreed.

The Bill's defeat would be a major blow to the government's authority and could lead to doubts about Chancellor Rachel Reeves' spending and tax plans, raising the odds of economy-hurting tax hikes in the Autumn.

Bigger picture, Starmer's weakening grip on his own party and inability to direct the fiscal journey will come as a shock to markets that had begun to price in a lengthy spell of settled UK politics.

Now, political uncertainty and the prospect of deteriorating economic fundamentals are squarely in the frame again.

For Pound exchange rates, this is never a good thing.

"The relative attractiveness of the pound will be diluted if the UK economy can not shake off its association with weak growth, struggling public finances, low business confidence and soft productivity growth," says Jane Foley, Senior FX Strategist at Rabobank.

Already, we see signs of suspicion in the market: the GBP/EUR exchange rate - which is considered the barometer of the UK economy - fell 3.5% in the first half of the year, weighed down by a flush of poor economic data releases in recent months.

For Pound Sterling, Bad Politics is Back_1

Above: GBP/EUR still hasn't recovered half of its post-Brexit fall.

Pound Sterling meanwhile lost ground against half of its G10 peers in H1, suggesting that the two-year spell of outperformance has finally been snapped.

The UK's benefits bill is growing at a staggering pace: the government says over 1,000 people a day were signing on for Personal Independence Payments (PIP), the benefit that is paid to people unable to work due to issues ranging from ill health and disabilities to stress and anxiety.

PIP payments had been projected to almost double to £41BN by 2030, and the Office for Budget Responsibility says overall spending on disability and incapacity benefits is set to rise to £100BN from £65 billion last year.

"The welfare budget's spiralling, from £40bn pre-Covid to £100bn by 2030. We challenged Labour to cut spending, get people into work & rule out tax rises. Starmer has failed on all counts, and the welfare bill is still set to rise," says Kemi Badenoch, leader of the official UK opposition.

For Pound Sterling, Bad Politics is Back_2

The open rebellion by ruling party MPs means the government risks losing control of spending and missing its fiscal rules that say it must start bringing down the debt spent on day-to-day spending by the end of the parliament.

At the very least, the government won't have the authority and mandate to pursue any meaningful attempts to bring down welfare spending or drive reforms in the current parliamentary cycle, which has at least another four years to run.

This means a potentially unbroken cycle of tax hikes from an already high starting point: taxes are already at their highest level since the Second World War. For Pound Sterling, Bad Politics is Back_3

For Pound Sterling, Bad Politics is Back_3

Image courtesy of Lloyds Bank.

Starmer's waning authority and inability to get a grasp on UK debt dynamics will raise concerns on global financial markets about Britain's fiscal health and whether or not it will be able to meet its debt repayment obligations over the long term.

The global context is important as the UK will need to borrow more from international markets as other countries also ask to borrow more:

President Donald Trump's One Big Beautiful Bill significantly expands America's debt requirements by nearly $4 trillion through 2034.Germany, Europe's largest economy, will ask to borrow substanitally more as it changes its own debt rules to spend on infrastructure and defenceFrance is en route to potentially hit a debt-to-GDP ratio of 10%But Europe and the U.S. have substantially bigger economies than the UK, with bigger central banks that can defend their currencies and test the market for longer.

The U.S. in particular can keep going far longer than the UK can.

This means it will be the UK that will be questioned by markets first, and meaningful spending cuts will become inevitable.

These reforms will be painful, requiring a big adjustment lower by the Pound.

Source: Poundsterlinglive

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Glendon

Economic

Forex

Worries over future U.S. tariffs are clouding the outlook for factories across much of Asia and Europe, according to surveys released on Tuesday which nonetheless showed some were able to shrug off the uncertainty and keep growing.

Among the bright spots, Japan's manufacturing read-out showed growth for the first time in 13 months, South Korea's activity contracted at a milder pace and China's Caixin PMI index also expanded in June - confounding an official survey that showed activity shrinking for a third straight month.

In Europe, Ireland, Spain and the Netherlands were among the star performers even as the wider euro zone read-out was broadly flat and Britain continued to contract, albeit more slowly.

Analysts said the underlying softness in surveys highlights the challenges facing businesses and policymakers as they try to navigate U.S. President Donald Trump's moves to shake up the global trade order with sweeping tariffs.

"We must recognise that the external environment remains severe and complex, with increasing uncertainties," said Wang Zhe, economist at Caixin Insight Group. The Caixin/S&P Global survey showed Chinese manufacturing PMI rose to 50.4, surpassing expectations in a Reuters poll.

Japan's final au Jibun Bank PMI rose to 50.1 due to an upswing in output, but overall demand remained weak as new orders shrank on concern over U.S. tariffs.

Factory activity in South Korea contracted for the fifth straight month though the pace of decline eased on relief over a snap presidential election on June 3 that ended six months of uncertainty.

In manufacturing, India was a significant outlier in the region last month, as activity accelerated to a 14-month high, driven by a substantial rise in international sales that helped spark a record-breaking spurt in hiring.

DEADLINE

Negotiators from major U.S. trading partners are rushing to reach deals with Trump's administration by a July 9 deadline to avoid import tariffs jumping to higher levels.

While China is continuing its negotiations for a broader trade deal with the U.S., Japan and South Korea have so far failed to win concessions on the tariffs imposed on their mainstay export items like automobiles. The 27-member European Union is embarking on new talks in Washington later this week.

The euro zone HCOB manufacturing Purchasing Managers' Index, compiled by S&P Global, edged up to 49.5 in June from 49.4 in May, its highest level since August 2022 - but still remaining below the 50 mark denoting growth in activity.

Moreover, national surveys revealed stark differences across the currency bloc. Ireland recorded the highest PMI at a 37-month peak of 53.7, while Greece, Spain, and the Netherlands also posted readings above 50.

"We seem to be in a sweet spot at the moment where it's domestic activity that's driving the index," John Fahey, senior economist at AIB, said of the Irish read-out.

"There may be some level of activity and investment that was postponed for two or three years, and you're just at the point now where that has to happen, even though there's a more uncertain global backdrop."

While Germany's manufacturing PMI reached its highest in nearly three years, it still indicated contraction. France, Italy and Austria on the other hand registered faster declines in manufacturing conditions.

In Britain, outside the European Union, the manufacturing sector showed some signs of turning a corner in its long slump.

"That said, any hoped for stabilisation remains fragile and subject to potential headwinds that could severely impact demand, supply chain reliability and future growth prospects," said Rob Dobson, director at S&P Global Market Intelligence.

Speaking at the start of a central bankers' annual get-together in Sintra, Portugal, European Central Bank President Christine Lagarde said the global environment had changed fundamentally since the inflation spurt of the pandemic years.

"The world ahead is more uncertain – and that uncertainty is likely to make inflation more volatile," Lagarde said.

Data on Tuesday showed euro zone inflation last month stood at the ECB's 2% target, confirming that the era of runaway prices is over.

Source: Reuters

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Michelle

Economic

Forex

European Central Bank Vice President Luis de Guindos has stated that a rise in the euro beyond $1.20 could create challenges for policymakers, though he sees current levels as no cause for concern.

In unusual comments from an ECB official on the exchange rate of the common currency, Guindos said the pace of the euro’s appreciation was a bigger concern than where it is now.

During the ECB’s yearly meeting in Sintra, Portugal, the Spanish official expressed that $1.17, or even $1.20, is not a big deal. According to Guindos, they can let it slide a bit. He added that $1.20 is fine, but anything above that would be much more complicated.

Luis de Guindos reveals impact of Trump’s tariff policies on the euro

The ECB typically avoids commenting on the euro’s value, maintaining that while the exchange rate factors into policy decisions, it doesn’t target any specific level — a stance Guindos reaffirmed.

Guindos said they focus on how the exchange rate changes and include its current level in their forecasts. The ECB’s vice president also clarified that they keep an eye on this, but their focus is not on a specific exchange rate.

Notably, the euro has benefited from a weakening dollar, driven by President Donald Trump’s tariff measures that have undermined market confidence, resulting in a nearly 14% rise this year. In response, Guindos emphasized the importance of preventing the euro from overshooting.

Meanwhile, reports on June 16 revealed that tariffs would weigh on eurozone economic growth and prices for years. However, Luis de Guindos noted there is little risk of inflation falling significantly, and the euro’s sharp rise against the dollar is not a major concern for now.

The ECB signaled a break in policy easing that month, even though it expects price growth to dip below its 2% target temporarily on the strong euro and low oil prices. This indicates that raising concerns about the ultra-low inflation marks that the pre-pandemic decade could return.

Nonetheless, Guindos dismissed those fears, saying that the ECB is finally close to reaching its goal after many years of missing it above and below.

In an interview, the ECB’s vice president speculated that the chance of falling short is quite small. Based on his argument, they believe the inflation risks are balanced.

The ECB signals a break in policy easing amid risks of inflation

One of the main reasons why inflation will rebound to target after falling to 1.4% in the first quarter of 2026 is that the labor market is tight and unions will continue to push for significant wage hikes, maintaining compensation growth at 3%, Guindos countered.

Although he did not directly call for a halt in easing policies, he mentioned that financial investors, who have bet on just one more interest rate cut, possibly towards the end of the year, correctly heard ECB President Christine Lagarde’s message.

Guindos elaborated by saying that markets clearly grasped what the President meant when referring to a strong stance. He added that he expects markets to believe and factor in that the ECB is very close to achieving its medium-term target of sustainable 2% inflation.

According to June reports, the euro is up 11% against the dollar in the past three months, reaching its highest level in nearly four years at $1.1632.

Interestingly, along with hitting exporters hard because of US tariffs, a stronger euro might also reduce the prices of imports even more.

However, Guindo, who was a former Spanish economy minister on the ECB board for the longest, said the exchange rate had not been volatile or appreciated quickly, which were two key measures in his estimation.

Source: CryptoSlate

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Warren Takunda

Economic

The head of the European Central Bank said inflation has become more unpredictable due to shocks like the COVID-19 pandemic and Russia’s invasion of Ukraine — and that policymakers need to take the possibility of such extreme scenarios into account and communicate them to the public as well.

“The world ahead is more uncertain, and that uncertainty is likely to make inflation more volatile,” ECB President Christine Lagarde said Monday in a speech opening the central bank’s annual conference in Sintra, Portugal. “It’s pretty basic but that’s the reality.”

One reason, she said, was that increasingly regular supply disruptions were leading companies to change their prices more frequently, a habit that goes beyond the recent burst of inflation in the U.S. and Europe and “reflects a structural shift in how firms operate under conditions of permanently higher uncertainty.”

The bank’s assessment of the economy needs to rely on taking extreme possible scenarios into account as well as the more likely baseline predictions, and it should let the public in on those possible outcomes as well, she said. Lagarde in particular cited the inflation spike that followed Russia’s invasion of Ukraine, where a baseline scenario based on higher energy prices suggest inflation for 2022 of 5.5% - but a worst-case scenario indicated more than 7% inflation, much closer to the final figure of 8%.

Another example was the pandemic, where spending by homebound consumers shifted from services like restaurants to goods such as home exercise equipment.

“Scenario analysis could have helped in illustrating that the range of possible inflation outcomes was unusually wide – and would have reduced the risk of projecting false certainty to the public,” Lagarde said.

The bank’s strategy review announced Monday reaffirmed its target of 2% for inflation, a goal it has met for the time being as annual price increases were 1.9% in May. The drop in inflation has let the bank cut its benchmark interest rate from a peak of 4% to 2%.

Threats of higher tariffs from U.S. President Donald Trump have added to uncertainty about the outlook for growth and inflation. The European Commission and US negotiators are trying to reach agreement on a trade deal ahead of a July 9 deadline.

The conference in Sintra is the ECB’s equivalent of the U.S. Federal Reserve gathering in Jackson Hole, Wyoming, and gathers top central bankers and economists from around the world. Fed Chair Jerome Powell is to take part in a panel on Tuesday with Lagarde, Bank of England Government Andrew Bailey, Bank of Korea Governor Chang Yong Rhee and Kazuo Ueda, the governor of the Bank of Japan.

Source: AP

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Glendon

Economic

Forex

The European Union is demanding immediate relief from tariffs in some key sectors as part of a trade deal with the United States, Reuters has reported.

However, citing EU diplomats, the news agency said Brussels still anticipates potential unfavorable imbalances in an agreement with Washington.

Tuesday’s report comes as negotiators are facing the looming expiration to a pause to U.S. President Donald Trump’s sweeping "reciprocal" tariffs on July 9. It remains unclear what how Trump will approach the end of the delay to the punishing levies, with White House officials saying that any extensions to the deadline would only be decided by the president.

Against this backdrop, the European Commission, which is negotiating on behalf of the EU, is reportedly set to put forward a range of demands during meetings with the Trump administration this week.

Along with specifically lower tariffs on items like alcohol and medical technology, which currently face a 10% U.S. tariff, the EU is also looking for a deal to cover commercial aircraft, pharmaceuticals and semiconductors, Reuters said. The U.S. has launched a probe into these industries, but has yet to place additional tariffs on them.

Meanwhile, the EU is aiming for U.S. concessions on 25% tariffs slapped on autos and auto parts, as well as a cut to duties on steel and aluminum, Reuters reported. The car levies, in particular, are a "red line" for EU negotiators, the report said.

Finally, the EU would reportedly like to see tariff relief once an initial agreement is reached, rather than having to wait for weeks or months before a final deal is signed.

For its part, the Trump administration has presented a list of their own demands to the EU, but did not include any concessions of its own, Reuters reported, adding that both camps are working to first achieve an agreement in principle and will then clarify the details later.

The EU has become a major target of Trump’s trade-related ire since his return to power earlier this year, with the president arguing that it has ripped off the U.S. through perceived unfair trade practices. Brussels has rebuffed the claims, and vowed to react "firmly" to "unjustified barriers to free and fair trade."

Source: Reuters

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Warren Takunda

Stocks

London stocks had reversed earlier gains to trade lower by midday on Tuesday as investors eyed US trade talks, with housebuilders in the red after disappointing data from Nationwide.

The FTSE 100 was down 0.3% at 8,735.08.

Kathleen Brooks, research director at XTB, said: "There is a mild risk off tone to markets on Tuesday as the focus swings back to trade deals as we get close to the July 9th deadline to forge trade agreements with the US. Fears are mounting that the UK and China are the only countries with agreements in place.

"The rally in US, Asian and some European indices in the past three months has been driven by hopes that Trump would perform his usual ‘TACO’ and cave in at the last minute. If he doesn’t do this or if he doesn’t kick the can down the road, then the stock market rally could come to an abrupt halt."

On home shores, a survey showed the downturn in manufacturing eased slightly in June as rates of decline in output, new orders and employment all slowed, while business optimism rose.

The S&P Global manufacturing purchasing managers' index increased to 47.7 last month, in line with the flash reading released a week earlier and the highest print in five months.

This was the third straight improvement in the headline PMI since it reached a one-and-a-half-year low of 44.9 in March, but the eight consecutive month of contraction - indicated by any figure below 50.0.

Four out of the five PMI components - output, new orders, employment and stocks of purchases - continued to fall but at a slower rate than the previous month, while vendor lead times lengthened at their lowest rate since March. Meanwhile, business optimism increased to a four-month high.

S&P Global said that manufacturing production was lower for the eighth straight month, as companies scaled back output in response to "weak market conditions, clients offsetting higher costs through reduced demand and uncertainty surrounding government policy, tariffs and the general economic/geopolitical situation".

Nevertheless, Rob Dobson, director at S&P Global Market Intelligence, the PMI survey "provides signs of conditions stabilising".

"The orders-to-inventory ratio, a reliable bellwether of future production trends, also climbed sharply to its highest since August 2024. Inflation of both input costs and selling prices meanwhile nudged lower to hint at a softening inflation trend," he said.

Investors were also mulling the latest British Retail Consortium-NIQ Shop Price Index, which showed that prices returned to inflation in June on the back of a big jump in food prices, fuelled by high wholesale prices and rising wage bills.

In equity markets, housebuilders Barratt, Taylor Wimpey and Persimmon were under the cosh after data from Nationwide showed that house prices unexpectedly fell on the month in June, by 0.8%, following 0.4% growth in May. Analysts were expecting a 0.2% jump.

On the year, house price growth slowed to 2.1% last month from 3.5% in May.

The average price of a home stood at £271,619 in June, versus £273,427 a month earlier.

Nationwide chief economist Robert Gardner said: "The softening in price growth may reflect weaker demand following the increase in stamp duty at the start of April. Nevertheless, we still expect activity to pick up as the summer progresses, despite ongoing economic uncertainties in the global economy, since underlying conditions for potential homebuyers in the UK remain supportive.

"The unemployment rate remains low, earnings are rising at a healthy pace in real terms (i.e. after accounting for inflation), household balance sheets are strong and borrowing costs are likely to moderate a little if Bank Rate is lowered further in the coming quarters as we and most other analysts expect."

Standard Chartered lost ground amid news the bank is facing a $2.7bn lawsuit as liquidators allege it helped to enable the laundering of billions of dollars misappropriated from Malaysian sovereign wealth fund 1MDB.

Supermarket chain Sainsbury’s reversed earlier gains even as it backed its full-year profit guidance and reported a sharp jump in first-quarter like-for-like sales as consumers tucked into its new range of ‘Taste the Difference’ products including Spanish Jamón Croquetas.

On the upside, heavily-weighted mining stocks were the biggest gainers, with Antofagasta, Glencore and Anglo American all up.

National Grid and SSE were both higher after Ofgem said it has given the provisional green light to an initial £24bn investment programme to enhance energy security "while enabling the transmission of more clean energy from renewable sources".

An initial £8.9bn in funding has been approved for the electricity transmission sector to upgrade grid, with National Grid set to receive £4.2bn and £3.1bn for SSE.