Starmer Exit Talk and Iran Talks Reshape FX Risk

PM Keir Starmer is widely expected to announce a timeline for his exit, possibly as early as today. That expectation crystalised after Andy Burnham's by-election win in Makerfield last week, which secured a seat in Parliament. Burnham is widely seen as the replacement. The open question is whether this unfolds as a prolonged leadership challenge or whether Starmer will signal a coronation. It would mark the seventh UK PM since the Brexit vote in 2016.

Investors are in the dark about what comes next, particularly on the fiscal framework and who replaces Chancellor Rachel Reeves. The Gilt market has been relatively calm through the uncertainty. Sterling has not been. The pair is penciling in fresh YTD lows, and the path of least resistance remains lower unless the leadership transition offers clarity on fiscal direction.

Canadian CPI and the Overpriced Hike

May Canadian CPI inflation data hits at 12:30 pm GMT. Markets are pricing 21 bps of BoC tightening by year-end. That looks excessive.

Canada's GDP growth has stagnated. Core inflation is around 2%. The unemployment rate has ticked upward since 2022, fluctuating between 6.5% and 7.0% from early 2025. Against that backdrop, 21 bps of tightening is a repricing candidate.

The market's minimum estimates put the trim and median prints below 2%. If both come in south of that threshold, even with an uptick in the headline (expected to reach 3% from 2.8% in April), the data would align with Governor Macklem's recent comments about core inflation ticking down. A headline increase alone would not be enough to change the BoC's posture, Macklem suggested.

A broad miss across the board would likely trigger a dovish repricing in rate markets and weighing on the CAD. The trade is asymmetric in that direction because the market has already priced a hike. If the data disappoints, there is more room for the CAD to sell off than for it to rally on a beat. The targeted trade remains CAD shorts on a soft core print.