Markets begin the week digesting two major political developments that are likely to influence sentiment over the coming days. Internationally, the conflict between the United States and Iran has escalated once again after last month’s ceasefire effectively collapsed, while closer to home the UK enters a new political chapter as Andy Burnham prepares to become Britain’s seventh Prime Minister in just ten years.
In the Middle East, hopes that diplomacy would gradually replace military action have faded rapidly. The weekend saw a further escalation in hostilities, with the United States carrying out its eighth consecutive night of airstrikes against Iranian military infrastructure, targeting coastal surveillance systems, missile and drone facilities, air defence sites and assets linked to operations around the Strait of Hormuz. The strikes followed attacks by Iranian-backed forces on U.S. personnel in Jordan, while Iran responded with further strikes across the Gulf region, including attacks that reportedly damaged critical infrastructure in Kuwait. Meanwhile, the Strait of Hormuz remains effectively paralysed, with commercial shipping still heavily disrupted and international organisations warning that security conditions have deteriorated to the point where even humanitarian evacuation efforts have been suspended.
For financial markets, the implications remain significant. The longer the disruption continues, the greater the risk that higher energy costs begin feeding back into inflation expectations just as many central banks are attempting to judge whether interest rates have finally peaked. Although oil markets have remained relatively orderly so far, investors are increasingly aware that every new headline carries the potential to alter the inflation outlook and, by extension, the path of monetary policy. Until meaningful diplomatic progress resumes, geopolitical developments are likely to remain one of the primary drivers of market sentiment.
The political focus then shifts to Westminster, where Andy Burnham is due to be sworn in as Prime Minister on Monday following Keir Starmer’s resignation and his overwhelming victory in the Labour leadership contest. Burnham inherits an economy facing sluggish growth, elevated government borrowing and persistent inflation, leaving little room for easy policy decisions. While his administration is expected to prioritise greater devolution of spending powers, accelerated housing development and increased regional investment, markets are already looking beyond the rhetoric and towards the fiscal reality. His first major challenge will be appointing a Chancellor capable of balancing ambitious spending plans with market confidence, particularly as speculation continues around further tax reforms and measures designed to strengthen the public finances.
For Sterling, the arrival of a new Prime Minister introduces another layer of uncertainty at a time when the Pound has actually performed relatively well against several of its major counterparts in recent weeks. Investors will be looking for early indications of the government’s fiscal direction, its relationship with the Bank of England, and how Burnham intends to position the UK diplomatically while conflict in the Middle East continues to escalate. Combined with another busy economic calendar, markets enter the week with politics, rather than economics, firmly in the driving seat.
Following a relatively quiet start to the week, Tuesday brings the first meaningful UK data releases, with employment figures taking centre stage. Markets will be watching average earnings, employment change and the unemployment rate closely, with consensus expecting little change from last month’s readings. If those forecasts prove correct, they should continue to support Sterling, particularly as markets have become increasingly confident that the Bank of England’s next move will be another rate increase rather than a cut.
Elsewhere, Germany and the wider Eurozone release their latest ZEW Economic Sentiment surveys. Expectations are for a modest improvement in confidence, suggesting that despite ongoing geopolitical uncertainty, businesses and investors are becoming slightly more optimistic about the outlook for Europe’s largest economy.
Wednesday shifts the focus firmly back to the UK, with inflation data arguably the most important domestic release of the week. Core inflation is expected to ease to 2.5%, while Producer Price Inflation (PPI) should also continue to soften. On the surface, lower inflation is welcome news for households and businesses, but it is unlikely to materially change the Bank of England’s current thinking. Markets have already largely priced in a September rate hike, and unless inflation surprises significantly in either direction, that expectation is unlikely to shift.
Attention then turns to Frankfurt on Thursday, where the European Central Bank announces its latest interest rate decision. No change is expected, with rates forecast to remain at 2.4%. As is often the case, the decision itself is unlikely to generate significant volatility, but President Christine Lagarde’s press conference afterwards will be scrutinised for clues about the remainder of the year. Markets continue to debate whether the ECB has one final rate increase left in this cycle, and any indication that policymakers remain concerned about inflation could provide further support for the Euro.
The week concludes with Flash PMI surveys covering New Zealand, Japan, France, Germany, the Eurozone, the UK and the United States. As these are preliminary estimates rather than final readings, markets typically treat them with a degree of caution unless they produce a significant surprise. Alongside the PMI data, the UK also releases retail sales figures. Economists expect growth to slow sharply to just 0.2% from the previous month’s 1.2%, although there is a reasonable argument that consumer spending may prove more resilient than forecasts suggest. Better weather, the start of the summer holiday season and increased spending around the World Cup could all provide a modest boost to retail activity.
Outlook
This is shaping up to be another week where politics and geopolitics overshadow the economic calendar.
The conflict in the Middle East continues to represent the single biggest risk to global markets. Every new development around the Strait of Hormuz has the potential to influence energy prices, inflation expectations and, ultimately, the outlook for central banks. At the same time, the UK enters a new political era under Andy Burnham, and markets will be looking closely for the first signals of his government’s economic priorities.
For Sterling, the week looks constructive if employment, inflation and retail sales hold up as expected. The Euro’s direction will largely depend on the tone struck by the ECB on Thursday, while the US Dollar remains caught between resilient domestic fundamentals and the uncertainty created by geopolitical events.
One thing has become increasingly clear throughout 2026: markets are no longer being driven solely by economic data. Politics, geopolitics and central bank communication are now just as influential as the numbers themselves. For anyone with currency exposure over the coming weeks, having a plan in place before markets move is becoming increasingly important, because by the time certainty arrives, exchange rates have usually already adjusted.
GBP/EUR 1.1759 GBP/USD 1.3456 GBP/AED 4.9445
GBP/AUD 1.9232 GBP/CHF 1.0856 GBP/CAD 1.8877
GBP/NZD 2.2992 EUR/USD 1.1428 GBP/ZAR 22.1859