Markets Size Up Britain's New Leadership (20-24 July)

Britain's political transition took center stage after Andy Burnham was confirmed as Labour leader and is set to become prime minister next week.

His expected appointment of Shabana Mahmood as Chancellor has helped ease concerns over fiscal policy.

Softer US jobs and inflation data weighed on the dollar, while expectations for further ECB tightening continued to support the euro. Oil prices remained firm, keeping inflation risks in focus and strengthening the case for higher interest rates. In China, weaker second-quarter growth contrasted with another record trade surplus, reflecting an economy driven by exports while domestic demand remains subdued.

Currencies

Dollar Index: The US Dollar Index stayed below 101, extending Thursday's losses after June payrolls rose just 57,000, well below the 110,000 forecast, while unemployment held at 4.2%. Weak private payrolls earlier in the week also reduced expectations for a September rate cut to 50% from 67%. Fed Chair Kevin Warsh acknowledged easing inflation but reiterated that restoring price stability remains the priority. The index is set for a weekly decline after two weeks of gains.
Euro: The euro traded around $1.145, close to its strongest level since June 19, and remained on track for a weekly gain against the dollar. Expectations for further ECB tightening continued to support the currency, with markets fully pricing a September rate hike and another by spring 2027. However, recent comments from Piero Cipollone and Martin Kocher suggest a move in July is unlikely.
British Pound: Sterling slipped below $1.345 after reaching a two-month high of $1.354 on Thursday, following confirmation that Andy Burnham will succeed Keir Starmer as Labour leader and become prime minister next week. Investors are now focused on his choice of Chancellor, with frontrunner Shabana Mahmood helping ease concerns over fiscal policy. Stronger oil prices reinforced expectations that the Bank of England will raise interest rates before year-end.
Japanese Yen: The yen weakened toward 162.5 per dollar, remaining close to a four-decade low as Tokyo continued to avoid direct market intervention. Reports that Japan's state pension funds will keep their current asset allocations also offered little support. Higher oil prices added pressure on the import-dependent currency, while traders continued watching for any signs of official intervention.

Commodities

Gold Can't Catch a Break

Gold fell below $4,000, approaching a nine-month low as rising oil prices strengthened expectations that US interest rates could stay higher for longer. Oil has climbed roughly 30% from its July lows after US-Iran tensions disrupted shipping through the Strait of Hormuz. Fed officials, including Beth Hammack, continue to warn that inflation remains a concern, with markets now pricing a 53% chance of a September rate hike, up from 47%.

Oil Climbs on Shipping Fears

Brent climbed above $90 per barrel as conflict around the Strait of Hormuz increased concerns over regional oil supplies. Iran declared its ceasefire over, intercepted vessels in the strait, and attacks reached energy infrastructure, including a reported strike on a Kuwait Petroleum facility. Brent has gained roughly 30% since its July lows.

Silver Pressure Builds Below $56

Silver held below $56, remaining near an eight-month low as higher oil prices supported expectations that interest rates may stay restrictive for longer. Markets continue to price a 53% probability of a September Fed rate hike, compared with 47% previously.

Fixed Income

US 10-Year Treasury Yield: The 10-year Treasury yield fell to 4.52% from 5.62% on July 13, as softer consumer and producer inflation, together with a second monthly decline in Michigan inflation expectations, pointed to easing price pressures. Political uncertainty following President Trump's comments on Chinese election interference and concerns over oil prices continued to shape the outlook. Futures imply roughly a two-thirds chance of another Fed rate hike by year-end, while July is expected to remain unchanged.
UK 10-Year Gilt Yield: The UK 10-year gilt yield held near 4.95%, its highest level in two months, heading for a third consecutive weekly gain. Investors assessed Andy Burnham's appointment as Labour leader and his upcoming move into Downing Street, while Shabana Mahmood's expected appointment as Chancellor helped calm fiscal concerns. Expectations for another Bank of England rate increase remained firm.
Japan 10-Year Government Bond Yield: Japan's 10-year yield rose to 2.73%, extending gains for a second session and approaching a 30-year high. Concerns over inflation and fiscal spending remained in focus after the government's ¥370 trillion investment plan through 2040. Reports that pension funds would maintain existing allocations also reduced expectations of additional support for the bond market.
Germany 10-Year Bund Yield: Germany's 10-year Bund yield climbed above 3.1%, reaching its highest level since May 20. Higher oil prices added to inflation concerns, supporting expectations that the ECB will continue tightening policy. Markets fully price a September rate hike, while recent comments from Piero Cipollone and Martin Kocher suggest July is unlikely.

Economic Data

US Inflation Rate

US annual inflation slowed to 3.5% in June, down from 4.2% in May and below expectations of 3.8%, marking the first decline in five months. Lower energy prices, helped by easing tensions earlier in the month, slowed annual energy inflation to 15.7% from 23.5%. Consumer prices fell 0.4% month-on-month, the largest decline since April 2020, while core inflation eased to 2.6% annually and was unchanged from the previous month.

US Retail Sales

US retail sales increased 0.2% in June, the slowest monthly gain in five months. Lower gasoline prices weighed on headline figures, while sales excluding gasoline rose 0.7%. Spending increased at auto dealers, online retailers, sporting goods stores, and electronics retailers, while gasoline station sales dropped 5.3%. Core retail sales, used in GDP calculations, rose 0.5%.

China Trade Balance

China's trade surplus widened to $125.62 billion in June, up from $113.84 billion a year earlier and above forecasts, marking the second-largest surplus on record. Exports rose 27% to a record $412.39 billion, while imports increased 36%, the fastest pace in five years, supported by demand for semiconductors and AI hardware. Trade surpluses with the US, Germany, and the EU also expanded, although the first-half 2026 surplus eased slightly to $575.98 billion.

China GDP

China's economy grew 4.3% year-on-year in the second quarter, slowing from 5.0% in the first quarter and missing the 4.5% forecast. It was the weakest growth since Q4 2022, as weak domestic demand, softer private investment, and the property downturn outweighed strength in AI-related exports. The reading remained below Beijing's 4.5%-5.0% target, reinforcing expectations for further policy support. The NBS pointed to external uncertainty and an imbalance between supply and demand, while noting that first-half GDP still grew 4.7%, supported by high-tech manufacturing and services.

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