The British pound experienced a decline on Monday, putting an end to its seven-session winning streak. The US dollar, meanwhile, showed tentative signs of stabilization and a modest rebound at the start of the week, following a sell-off triggered by disappointing US employment data.
The pound was last seen trading at $1.3348 against the dollar, down approximately 0.01% on the day, while it held steady against the euro at £0.8553.
Last week's US monthly jobs report revealed that non-farm payroll additions for June fell significantly short of market forecasts. Furthermore, data for May and April was revised downward. This prompted investors to scale back bets that the Federal Reserve might initiate an interest rate hike this month, leading to a broad-based weakening of the US dollar.
This dynamic propelled the pound to a 1.1% gain against the dollar last week, marking its strongest weekly performance in nearly three months.
A retreat in oil prices towards the $70 per barrel level has somewhat alleviated the pressure on global central bank officials, including those at the Bank of England, to raise interest rates. Current market pricing indicates a roughly 70% probability of just one UK interest rate hike this year. This contrasts with expectations from just weeks ago, which anticipated at least one hike with a strong possibility of two.
Bank of England Governor Andrew Bailey stated last week that the central bank is not yet in a position to consider cutting interest rates. A separate survey released by the BoE showed that, in the three months to June, UK businesses expect to raise their output prices by 4.1% over the coming year. This figure is up from 4.0% in May and represents the highest level since the start of 2024, suggesting that the impact of the energy price shock on corporate pricing plans has not fully dissipated.
On the political front, Andy Burnham, the Mayor of Manchester and a leading contender to succeed Keir Starmer as Prime Minister, has yet to finalize his choice for Chancellor of the Exchequer. Investors are showing clear concern over who will fill this key role and the potential implications for the UK's strained public finances.
Data from the online prediction market Polymarket shows that the probability of former Energy Secretary Ed Miliband becoming Chancellor has risen to 55%. Miliband is known for his left-leaning stance and a tendency towards more expansionary fiscal policy.
"Andy Burnham looks highly likely to take over as Prime Minister around the 20th of this month, but first he needs to settle on a Chancellor," said David Stritch, a currency analyst at Caxton FX. "It is a surprise that Ed Miliband is the betting favorite, and the reasons are puzzling—the former Energy Secretary and Labour leader is famously associated with expansionary budget thinking, which is unlikely to be palatable to the Treasury."
Burnham stated last week that he had not yet made a final decision on the appointment. When Starmer announced his impending resignation on June 22nd, Polymarket traders assigned a 73% probability to former Health Secretary Wes Streeting becoming Chancellor, with Miliband at just 10%.
Since then, UK government bond yields have fallen by 12 basis points to 4.79%, though they have edged up slightly from the three-month low of 4.676% touched on June 24th as Miliband's perceived chances have increased.