Markets begin the week with UK politics back firmly in focus after a dramatic weekend for Labour and growing speculation around Keir Starmer’s future as Prime Minister. Multiple reports over the weekend suggested Starmer spent time at Chequers discussing how to regain control following disastrous local and devolved election results, with pressure inside the party continuing to build rather than fade. While there is no formal leadership challenge under way, the tone coming from Westminster has clearly shifted from whether Labour has a problem, to how serious that problem could become over the months ahead.
Much of the focus now centres around the upcoming Makerfield by-election and Andy Burnham’s potential return to Westminster. Labour’s NEC has approved Burnham to stand in the selection process, and if successful, he is widely viewed as one of the strongest possible challengers to Starmer’s authority within the party. The political implications are significant because markets dislike uncertainty, particularly when it raises questions around leadership stability, fiscal direction and long-term policy consistency. While Sterling has remained relatively resilient recently due to firmer UK inflation and growth data, political instability tends to cap GBP rallies over time. We have already seen Sterling weaken notably since the local elections, and if uncertainty around Labour’s direction continues to build, the Pound may remain vulnerable heading into the summer.
At the same time, geopolitical tensions in the Middle East remain a major macro risk for global markets, with the U.S.–Iran conflict continuing to escalate in both rhetoric and economic impact. Over the weekend, the key flashpoint centred around the Strait of Hormuz, where Iran moved closer towards formalising greater control over shipping through the waterway. Iranian officials announced plans for a new system that would effectively require shipping companies to pay fees for “specialised services” in order to safely transit the Strait, framing the charges as mandatory maritime insurance. More importantly, Tehran suggested that only countries and commercial operators “cooperating with Iran” would benefit from the arrangement, directly challenging the ongoing U.S. naval blockade in the region.
The situation becomes even more significant when considering the importance of the Strait of Hormuz to global energy markets. Roughly a fifth of the world’s oil passes through the route, meaning any threat to shipping immediately raises concerns around supply disruption, higher energy prices and renewed inflationary pressure globally. Iran also claimed over the weekend that it is coordinating management of the Strait with Oman, describing it as effectively an Omani-Iranian controlled waterway. Western governments have pushed back strongly against the proposal, arguing that imposing tolls or restrictions on commercial traffic through an international strait would be unlawful.
Meanwhile, with the U.S. blockade on Iranian ports still firmly in place, Iran appears to be actively restructuring trade routes to avoid restrictions. Reports over the weekend suggested Tehran has significantly increased overland and rail trade with China while also developing new supply corridors through Pakistan and Iraq. This highlights how the conflict is evolving beyond military tensions and into broader economic and trade disruption. Diplomatic negotiations also appear increasingly fragile. President Trump rejected Iran’s latest peace proposal over the weekend, describing it as “totally unacceptable,” with the main sticking point continuing to be Iran’s uranium enrichment programme. Washington is still demanding full dismantlement of Iran’s enrichment capabilities, something Tehran has repeatedly refused to accept. Trump also warned Iran it would face a “very bad time” if a deal is not reached soon, maintaining the aggressive tone that markets have become increasingly sensitive to.
There are also signs that the conflict risks widening regionally despite ongoing diplomatic efforts. A drone strike caused a fire at an electrical generator at the Barakah Nuclear Power Plant in the UAE over the weekend, while Israel continued heavy strikes on Hezbollah positions in southern Lebanon despite the U.S. announcing an extension to the Israel-Lebanon ceasefire framework. As a result, oil prices remain highly sensitive, the U.S. Dollar continues to attract intermittent safe-haven demand, and broader market sentiment remains fragile.
Looking at the economic calendar, this is shaping up to be a very Sterling-focused week. On Tuesday morning, we have UK employment data, with average earnings expected to soften to 3.5% while unemployment is forecast to remain at 4.9%. Any rise in unemployment beyond expectations would likely weigh further on an already fragile Pound, particularly given how sensitive Sterling currently is to domestic data and political headlines.
Wednesday then becomes one of the key days of the week with UK inflation data. Following hotter inflation readings in the U.S., markets are increasingly concerned that the UK could see a similar pattern, particularly given the impact of rising energy prices. If inflation surprises to the upside, it would further complicate the Bank of England’s position. Only a few months ago, markets were expecting rate cuts, but rising inflation pressures now make that far less realistic. Higher inflation may support Sterling initially through higher rate expectations, but over time it also raises concerns around growth and consumer pressure in the UK economy. Eurozone inflation figures follow later in the day, where similar pressures are expected to emerge. In the evening, we also have the FOMC minutes from Jerome Powell’s final Fed meeting as Chair. Markets will be looking closely for any indication that the Federal Reserve is becoming increasingly concerned about inflation persistence and whether further hikes may eventually need to return to the conversation.
Thursday brings flash PMI data from France, Spain, Germany, the Eurozone, the UK and the U.S. Flash releases are preliminary estimates, so markets do not always react aggressively unless there is a meaningful deviation from expectations. However, given current concerns around slowing growth globally, weak PMI readings could reinforce fears that higher energy costs and tighter financial conditions are beginning to damage economic activity more broadly.
To wrap up the week, we have UK retail sales on Friday. Better weather across the UK may support consumer spending and produce a stronger reading, but if households continue pulling back due to higher costs and political uncertainty, then a weaker figure could add further pressure to Sterling heading into the weekend.
Overall, this is shaping up to be an extremely important week for the Pound. While the economic data itself matters, it would be a mistake to ignore the growing influence of UK politics on Sterling sentiment. Markets are becoming increasingly sensitive to political instability, and if concerns around Labour’s direction continue to grow alongside fragile global sentiment, political headlines could end up having just as much impact on GBP as the economic releases themselves.
GBP/EUR 1.1464 GBP/USD 1.3348 GBP/AED 4.9027
GBP/AUD 1.8661 GBP/CHF 1.0477 GBP/CAD 1.8342
GBP/NZD 2.2799 EUR/USD 1.1625 GBP/ZAR 22.2479