Sterling wobbles on Starmer challenge

After crashing by more than 2% against USD and 1% against EUR last week, sterling has been fighting its way back. However, it remains the second worst performing currency against USD of all the G10 this year. The prompt for recent weakness was the threat to the prime minister’s position and the risk to both political and economic stability that his defenestration could cause. In the meantime, economic data has been mixed, with a rise in unemployment but also a strongly growing economy in the first quarter of this year, and last month’s inflation lower than expected at 2.8%. So, maybe there won’t need to be an interest rate rise this summer after all, with implications for sterling.  

The single currency has not been on a single track of late, having lost out to the US dollar, yen and Norwegian krone but gaining on the Antipodean currencies. Against sterling, movements have been small – with both currencies similarly under threat from oil-crisis-induced inflation. On which note the final inflation result for April across the bloc was 1%, which is quite the rise for just one month. No-one thinks the ECB will be raising rates at its next meeting in June, but they’re odds on to raise at some point in 2026. 

The dollar is benefitting from the USA having its own oil supply, as well as being the world’s safe haven in dangerous times – which we are in, if you hadn’t noticed. Even so, the economic data continues to be positive, with next week’s GDP report for the first three months of the year expected to showcase strong growth. The appointment of Kevin Warsh as new chair of the Federal Reserve was supposed to result in interest rate cuts that could have hit USD, but that’s no longer guaranteed.