Economic Update
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Labour's decisive victory shakes up UK politics; market reactions and global implications
7 minute read08 July 2024
GBP
On Friday, Labour secured a decisive victory in the UK general election, winning 412 out of 650 seats. The Conservatives won 121 seats, and the Liberal Democrats secured 72. This result marks the worst defeat in the Conservative Party's parliamentary history. Prime Minister Rishi Sunak has accepted responsibility for the defeat, acknowledging the nation's anger.
Keir Starmer, the new Prime Minister, will start his tenure by visiting all four nations of the United Kingdom. He aims to dismantle the previous government's controversial Rwanda Scheme and the new Labour government is expected to prioritise improving the UK's relationship with the EU, with Foreign Secretary David Lammy advocating for a "wide-ranging security pact."
Elsewhere in the newly formed cabinet, Labour's Defence Secretary, John Healey, has already travelled to Ukraine, pledging new military supplies and reaffirming commitments made by Sunak in April. Health Secretary Wes Streeting plans to meet with junior doctors to address long-standing industrial action and with the British Dental Association to discuss fulfilling Labour's promise of 700,000 urgent appointments.
Sterling has risen over 0.5% against the USD since Thursday, reflecting market optimism following Labour's win. Bloomberg currently prices a 67.5% probability of an August rate cut, with a September cut almost fully priced in at 98.8%. The UK's GDP data, expected on Thursday at 7 am, could influence these probabilities ahead of next Wednesday's CPI data release. GDP is forecast to rise slightly from 0.0% to 0.2%.
EUR
The French elections on Sunday resulted in a political deadlock, with no group winning a majority. The New Popular Front (NPF) unexpectedly took the top spot with 182 seats, while Marine Le Pen's National Rally won 143 out of a total of 577 seats. The parties need a coalition of 289 seats to form a majority, with the most likely outcome at the time of writing being an alliance between left and centrist parties.
Whatever happens, the outcome will be challenging with a fragmented parliament and the political landscape in France remains uncertain. President Macron must decide who to ask to form a new government, which will then face a confidence vote in the National Assembly, which, if unsuccessful, means the president cannot call another parliamentary election for 12 months. Prime Minister Gabriel Attal has offered his resignation but will remain in a caretaker role until a new government can be formed
The results seemed to only have a minor impact on the euro, with only a 0.3% drop against the dollar and 0.4% against the pound on Sunday.
Looking ahead to next week’s interest rate decision, the market isn’t anticipating a rate cut from the ECB at their meeting on Thursday 18th July, although a 76.4% chance of a September cut remains. Non-Farm Payrolls exceeded forecasts at the end of last week, coming in at 206K versus the expected 191K, indicating a strong yet cooling labor market. This week is data-heavy in the US, with Fed Chair Jerome Powell set to testify on the Semi-Annual Monetary Policy Report before the Senate Banking Committee and the House Financial Services Committee on Tuesday and Wednesday at 3pm. The main data point will be the CPI release on Thursday at 1:30pm. Monthly CPI is expected to rise by 0.1%, while yearly CPI is forecasted to drop to 3.1%. At the moment, markets are fully pricing in a November rate cut from the Fed, however, if inflation falls to 3% or below, a second rate cut in December could be more likely too. Additionally, this week we will see the release of US unemployment claims and PPI data on Friday at 1:30pm, followed by the Preliminary University of Michigan Consumer Sentiment at 3pm. USD
This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.
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