Sterling proves resilient as Starmer says good bye

Conflicting news from the Middle East initially lifted oil prices and weighed om risk-taking appetites, but US-Iran negotiations continue and both sides report progress. Oil prices have come back off. The dollar is mostly firmer but so far has held above last week’s lows against the euro and sterling. The yen snapped a five-day slide ahead of the weekend but is softer today, and the greenback is knocking against the recent high (~JPY161.80). The Canadian dollar is extending is slide into the eighth consecutive session. 

Given the light economic diary today, politics are in the spotlight. The UK’s sixth prime minister since Brexit a decade ago has resigned and will oversee the selection process of his successor. Sterling was initially sold but has come back to record near session highs late in the European morning. US-China tensions have taken a turn for the worse. Apparently in response to the US decision this month to add some of China’s largest companies to a list of companies that aid the military, Beijing has sanctioned two US rare earth companies. It maybe mostly symbolic as the two companies reported have reported largely cut off inputs from China. 

Prices  

G10

The euro initially was sold to its lowest level since mid-March (~$1.1420) ahead of the weekend before recovering to new session highs late in the holiday-thinned North American session near $1.1480. That is around the low it saw in the initial reaction to the hawkish hold by the FOMC on June 17. It drifted back to almost $1.1440 in Europe before steadying. A band of resistance is seen between $1.1480 and $1.1520. 

The dollar consolidated roughly the half yen above JPY161 ahead of the weekend. The apparent failure of the April-May intervention, and the apparent silence of US authorities, may be emboldening the market. The dollar held above about JPY161.20 today and is testing the JPY161.80 area in Europe. The high from July 2024 was near JPY162, the highest since 1986. 

Sterling came within a few hundredths of a cent of the year’s low recorded at the end of March near $1.3160 ahead of the weekend. But it recovered to new session highs around $1.3240 in the waning hours of the week’s activity. It settled firmly but still below the low from the initial reaction to the FOMC meeting (~$1.3260). It tested $1.3180 in early European turnover, seemingly initially weighed by the political uncertainty that as lifted when Prime Minister Starmer indicated he would resign and open formal contest for his replacement on July 9 and the process would be completed by September 1, the end of Parliament’s summer break. Sterling recovered to new session high near $1.3250. A move above $1.3280-$1.3315 would lift the technical tone. 

The Canadian dollar is extending its drop for the eighth consecutive session today. It is at its lowest level since April 2025. In the 16 sessions this month, counting today, the Canadian dollar has declined in 13. Last week’s US dollar closed above the H2 25 high (~CAD1.4140) contributes to the favorable technical tone. The greenback reached almost CAD1.4195 today. As one can imagine, the momentum indicators are stretched. The upper Bollinger Band is near CAD1.4180 today. We are alert for a possible reversal pattern.

The Australian dollar recovered from a six-day low near $0.6990 and settled little changed last Friday, a little above $0.7010. It stalled near $0.7025 today and is straddling the $0.7000 area late in the European morning. A break of $0.6980, the month’s low could signal the next leg lower. Options for nearly A$1 bln at $0.7010 expire today. 

EM

The Mexican peso is consolidating in last Wednesday’s trading range (~MXN17.18-MXN17.44). The dollar is in a MXN17.3165-MXN17.3685 range today. The market is confident tht the central bank will maintain the 6.5% overnight rate target when it meets on Thursday. 

The dollar reached a four-week high against the offshore yuan ahead of the weekend (~CNH6.7980). It is consolidating today between CNH6.7730 and CNH6.7865 and threatening to three-day advance. The PBOC set the dollar’s reference rates at CNY6.8150, matching the highest since June 8. 

Ahead of the weekend, the Indian rupee snapped a five-day advance, and on Friday the loss was miniscule. It was the fourth week in the past five that the rupee settled firmer. The rupee extended its retreat today, falling a little more than 0.35%. The dollar reached INR94.7550, its highest level since last Monday. A gap is found between ~INR94.7735 and INR94.9475.

Other markets

While US markets were closed before the weekend, Asia Pacific and European equities fell. The MSCI Asia Pacific index fell for the first time in six sessions. It reached a record high on June 18. Most of the large bourses in the area rose today. Hong Kong, Australia, and New Zealand were exceptions. Europe’s Stoxx 600 had broken a five-day winning streak on June 18 and fell further on the 19th. It fell to a six-day low today. The record high was set at the start of last week. US index futures are narrowly mixed. 

Benchmark 10-year yields jumped mostly 4-6 bp ahead of the weekend among the G10 countries. The 10-year UK Gilt yield rose the most, almost nine basis points, perhaps pushed higher by the deterioration in the government’s finances that was reported. The Gilt yield is off a little more than two basis points today, in line with most European bonds today. The US 10-year Treasury yield is about three basis points higher at 4.48%. 

Gold gapped higher last Monday and made a marginal new high on Wednesday before reversing lower last week. After the bearish midweek outside down day, the yellow metal continued to sell-off and reached $4122 ahead of the weekend. It has come back firmer today and tested the $4220 area. A move above $4235 may help improve the technical tone. Silver did not trade much better at the end of last week, but it has returned bid and risen above the pre-weekend high. A close above would be constructive. 

August WTI was sold to about $72.85 last Thursday. It recovered and settled near sessions highs (~$76). Follow-through buying ahead of the weekend lifted it to almost $76.80. The gains were extended to almost $78.15 today, when it looked as if the US-Iran talks were breaking down. However, progress is now being reported by both sides, and August WTI has reversed lower. It is near $75.25 ahead of the start of the North American session. 

Data

The US economic calendar is light this week. The highlight is the midweek income, consumption, and deflator reports. Household consumption is expected to have outpaced income in May again. Outside of rounding, the deflator tends not to surprise. The headline will likely rise above 4%, while the core edged up to 3.4% from 3.3%. The preliminary PMI will be reported the day before and May durable goods orders the day after consumption, income, and deflator data. Durable goods orders look to have fallen by around 5% after jumping 8% in April. Governor Waller speaks early today at a Federal Reserve conference today in Washington on the international role of the dollar. A few Fed presidents (Williams, Goolsbee, and Kashkari) are scheduled to speak Thursday/Friday. 

Canada reports May CPI today. While headline inflation is elevated (2.8% in April year-over-year), the core rate is mild at 1.5%. The underlying core measures are hovering around 2.0%. Today’s report is unlikely to sway the market that sees the central bank is on hold at least until Q4.

Mexico reports April retail sales tomorrow alongside the IGAE economic activity report that serves the function of a monthly GDP. It has stabilized after an exceptionally poor January. The week’s highlight is Thursday’s central bank’s decision, but it is on hold with its policy rate at 6.5%. The Colombian presidential run-off election appears to have resulted in Espriellla’s victory. Although final results will be confirmed by the end of the week, it looks like a shift to policies more aligned with the US. Last Tuesday, the greenback fell to a five-year low against the Colombian peso (~COP3409). 

The eurozone, UK, and Japan have quiet starts to the week in terms of data with Wednesday’s preliminary PMI the main feature. The same is true of Australia, but it will also report May CPI on Wednesday and employment on Thursday. 

China has announced export controls against two important US rare earth producers. The move seems to be in response to the US adding some of China’s largest companies to its entity list due to ties to the Chinese military.