27 June 2025: Starmer faces a crisis of confidence in his leadership

It seems that the prospect of a damning defeat in Parliament in the end became too much for the Prime Minister to bear. Late into last evening, Sir Keir Starmer was calling the 120 or so backbench MPs who had tabled an amendment to the Welfare Reform Bill, which means that it was dead in the water.

He will announce a compromise later today in which current claimants will receive unchanged personal independence payments and those on Universal Credit will see the disability portion of the benefit remain unchanged.

It will mean that it is “back to the drawing board” for the Chancellor and her Treasury team to come up with the savings that she had announced in her recent spending plans.

While the climbdown will be a massive embarrassment, it will have serious consequences for the Government's reform agenda, possibly lasting for the entirety of this Parliament.

The Opposition Parties will undoubtedly now ask about who is effectively running the country, while Labour’s top team of Starmer, Rachel Reeves and Angela Rayner could easily find their continuing in their roles extremely tough, although none are likely to resign.

There is growing concern about what the Prime Minister may have been able to gain from his support for the increase in the NATO budget to 5% of GDP. It is rumoured that the support Starmer provided to Donald Trump at the NATO meeting in The Hague could have been the factor that changed the minds of European Leaders.

It is hoped that the announcement of a full agreement on tariff-free trade between the UK and the U.S. will be confirmed in the coming days.

According to Bank of England Governor Andrew Bailey, a lot is going on in the world around us. Escalation of the conflict in the Middle East drove up energy prices in the past few weeks, but in the last few days, they have come back down again. Global trade policies remain unpredictable. These are things that weigh on the global economy.

Elevated global uncertainty affects UK businesses too. Bailey has witnessed that clearly when he talks to business leaders from across the country.

Expectations for export sales have softened, investment decisions have been delayed, and supply chains have been adjusted, though on investment, the messages delivered by the Prime Minister are positive and welcome news.

The pound reached its highest level in almost four years yesterday as the dollar lost ground, as it was rumoured that the U.S. President had decided to relieve the Chairman of the Federal Reserve of his duties before the end of his current term.

It reached a high of 1.3766 before drifting back to close at 1.3728

Strong rumours are circulating in Washington that President Trump’s patience has run out with Fed Chairman Jerome Powell, who he believes is constantly defying him, having left interest rates unchanged since the start of the year.

Trump has been severe in his criticism of Powell, and his name-calling has bordered on the insulting. To his credit, Powell has remained stoic in his refusal to yield to the demands of the Administration that rates should be cut immediately and significantly.

Trump believes that the Central Bank should make the equivalent of ten cuts, or two hundred and fifty basis points, to the Fed Funds rate before the end of the year.

Powell’s colleagues on the Federal Open Market Committee have supported the decision to leave rates unchanged, given the uncertainty that surrounds the inflationary effect of the imposition of tariffs on U.S. imports.

Were Trump to provide a little clarity about his intentions, that may encourage the Fed to act, although there is still an underlying belief that with job creation showing steady if not exceptional growth and inflation proving to be stubborn, while just above the target rate of 2% rates are where that needs to be.

Of greater concern is the presumed threat to the independence of the Central Bank that has been enshrined in the constitution by Congress.

Trump will likely install, if not, a puppet chairman. Then, certainly, a like-minded individual who will be “open to suggestion” around monetary policy changes.

Trump’s decisive action in the Middle East and his demand for a ceasefire between Iran and Israel have seen the oil price retreat back to levels it was at before the strikes on Iran’s nuclear facilities, but the dollar is still suffering.

The dollar index fell to a low of 97.04 yesterday as rumours of Powell’s departure drove concerns. Several members of the FOMC have spoken in favour of the Fed’s “wait and see” policy and, with the most outspoken of them, discussed the possibility that rates will remain unchanged for the entire year.

Although the announcement of a ceasefire between Iran and Israel has capped the conflict in the Middle East for now, the announcement from Iran’s Supreme Leader that the U.S. Strikes have had negligible impact on his country’s uranium enrichment programme has led to fears that Israel may continue the conflict, since by Khamenei’s admission, the action failed in its objective.

ECB Vice President Luis de Guibdos spoke yesterday of his fear that any resumption of the conflict will have a seriously adverse effect on the growth prospects of the Eurozone.

Having seen national leaders from the Eurozone almost harangued into agreeing to an increase in the Budget of NATO to 5% of GDP, de Guindos is concerned that higher energy prices as a result of conflict in the Middle East might weaken the Eurozone economic growth and thus have a dampening effect on inflation.

Energy prices are likely to remain volatile for as long as a fresh outbreak is possible.

“The outbreak of the Iran/Israel conflict adds further uncertainty to oil price developments, according to de Guindos. He went on to note that such developments could hit growth in the region. It is therefore important to closely monitor what is happening in the real economy to provide some form of buffer to the global outcome.

Meanwhile, ECB Executive Board Member Isabel Schnabel gave the most upbeat view of the economy that she has had in more than a year. Schnabel has, in the past, been overwhelmingly concerned by the prospects for inflation, believing that if it can be controlled, economic growth will follow.

With the ECB having cut rates consistently over most of the past year, she feels that it is time for a pause, although some of her colleagues, Mário Centeno in particular, believe that cuts should continue for two reasons. They would slow the fall of inflation, which is likely to fall well below the ECB’s 2% target, and encourage further economic activity.

The Euro was caught up in the dollar weakness following the likely threat to Jerome Powell’s position as Fed Chairman.

The single currency rose to a high of 1.1740 and closed at 1.1680 as commercial selling interest emerged. Any further increase in the value of the Euro may be tough, given its overbought condition and the presence of additional commercial and speculative sellers.

Have a great day!