Gulf tensions see oil and buck bid, UK ushers in new PM

* President Trump warns Iran it will pay for killing US soldiers

* Gilts rattled by new PM Burnham’s comments, Healey shock new Chancellor

* USD rises as US-Iran conflict intensifies; sterling gives back gains

* US stocks edge lower, chip stocks rebound ahead of Big Tech earnings

FX: USD rose for a third straight day as Middle East tensions continued to keep crude elevated, even after a 23% move higher this month. Hormuz traffic has ground to a halt though there has been chatter around mediations and ceasefire talks. Brent crude had initially jumped above $90, the first time in six weeks, before paring gains. Last week’s soft inflation data dampened Fed rate hike expectations but there’s still more than a 50:50 bet of a move in September.

EUR lagged most of its peers as the major dipped back to the prior long-term low at 1.1410. That means the bear channel from the mid-May highs remains intact, with a move needed above the 50-day SMA at 1.1521 to change this. However, the outlook for relative central bank policy has once again shifted in favour of the euro on the back of a material repricing in hiking expectations for the ECB. This comes ahead of Thursday’s widely expected ‘on hold’ decision by the ECB. A September rate move is virtually fully priced in, and all eyes will be on any signals around that post-Summer decision.

GBP was midpack among its peers as the UK ushered in its seventh PM since 2016. Short positioning has seemingly helped the pound recently outperform. The new surprise choice of Chancellor and the UK’s tight fiscal situation are now front and centre for markets and if sterling can hold onto recent gains. New PM’s comments about seeking ‘any flexibility’ in the fiscal rules grabbed some headlines. A new cabinet will have to turn to tax increases if it wants to build out its plans to improve areas such as social care. We get jobs, inflation and PMI data this week with currently around 36bps of BoE rate hikes priced in for 2026.

JPY could finally be breaking to the upside and past the recent peak at 162.83. That sits just above the long-term top from July 2024 when we saw major intervention at 161.95. Against some predictions, Tokyo declined to intervene over Monday’s public holiday. Does give the green for markets to push the major higher?

US stocks: The S&P 500 lost 0.19% to close at 7,443, the Nasdaq closed up 0.04% at 28,604 and the Dow Jones settled lower by 0.59% at 51,844. Energy, Technology and Communication Services were the only sectors to outperform, with the latter supported ahead of Alphabet’s earnings on Wednesday after reports the company is developing a new server chip.  It is designed to integrate the architecture of its Gemini AI model directly into silicon to improve inference efficiency. Health Care and Materials lagged. Chip stocks led gainers with Micron, Sandisk and Seagate among the best performers, and rebounding after double-digit losses on Friday. Industrials are in focus on Tuesday with earnings from Freeport-McMoRan, GM, Halliburton and Northrop Grumman.

Asian Stocks: Futures are mixed. APAC stocks were also mixed as risk sentiment wavered on the increasing weekend Gulf tensions. The ASX 200 was rangebound with no new drivers. The Nikkei 225 was on holiday.  The Shanghai Comp and the Hang Seng rallied with energy and tech strength amid higher oil prices and a new Qwen model.

Gold printed a doji candle denoting some indecision between bulls and bears. Major support sits around the major $4,000 psychological level.

Day Ahead – UK Jobs

The UK labour market is predicted to remain soft with vacancies likely to hit a new post-pandemic low. Expectations are for the jobless rate to remain steady at 4.9% while private sector pay growth is trending lower. This is due to little sign of a turnaround in the struggling consumer services sector. Operational issues mean the data may be looked through.

April’s report was a somewhat stronger-than-expected series, though the details showed that firms remained cautious about making new hires. After the release, Governor Bailey said the labour market was showing some further softening, while BoE official Mann said such activity had seen a moderation. A softening that speaks against any tightening, works against current market expectations of roughly 36bps of rate hikes by end-2026 and chimes more with the on-hold for the foreseeable future narrative.

Chart of the Day – EUR/GBP breakdown finds support

Sterling has surprised many with its recent resilience owing to a relatively calmer domestic political situation, big short positioning being squeezed and equity flows into the UK owing to cheap valuations. EUR/GBP has not benefitted, with a triangle pattern that kept bouncing off support around 0.8620 but risked breaking to the downside. With Starmer’s exit and Burnham ‘s coronation as the next PM, the political narrative became a more stable one, at least in the short run and we got a sharp move to the downside with prices falling quickly through the 50% and 61.8% retracement levels of the February 2025 to November 2025 move. This popular cross has found support at the latter. Politically, the 2026 November budget will be PM Burnham’s litmus test, with all attention on the new Chancellor’s policies.