2 July 2025: Starmer is humiliated by his own backbenchers

The Prime Minister was forced into another U-turn yesterday to get his welfare reform bill through a vote in the House of Commons, and even then, several Labour MPs still voted against the measures. Keir Starmer has been forced to abandon the central plank of his welfare bill to get it past its first Commons hurdle, with a dramatic climbdown that meant he had to drop disability benefit cuts to avert a major Labour rebellion.

After a week of chaos that has badly damaged the Prime Minister’s political authority, Labour MPs were finally won over by a commitment to shelve plans for deep cuts to personal independence payments.

But while the controversial bill passed its second reading, the saga has exposed tensions between No.10 and Labour backbenchers and created a huge headache for the Chancellor, Rachel Reeves, who will now have to find a further £2.5bn of savings in her autumn budget.

Tax rises in the Autumn now seem inevitable, as Labour is falling into the trap of being the “tax and spend” Government that the Conservatives said they would be at the General Election.

A total of 49 Labour MPs voted against the second reading, more than three times greater than the previous biggest rebellion of 16, which was on an amendment to the planning and infrastructure bill last month. The universal credit and personal independence payment bill passed its second reading on Tuesday by 335 votes to 260, a majority of 75.

MPs were particularly concerned that the government’s own poverty analysis showed that, even after a series of concessions, 150,000 of the most vulnerable people would end up in relative poverty as a result. Officials said the modelling did not take into account the changes being made to the NHS and back-to-work schemes.

Shadow Chancellor Mel Stride has said Rachel Reeves is running out of money after Keir Starmer made another huge concession to rebels to avoid defeat on his welfare bill.

There was a modicum of good news amongst the debris of last evening’s disastrous vote. The Office for National Statistics announced earlier in the day that they had upwardly revised the GDP figures for the first quarter after it was found that they had underestimated the level of growth in March.

This means that growth in the period between January and March was 0.7% rather than the 0.5% previously indicated, although any celebrations were also tempered by the fact that house prices fell by their highest rate in two years.

As he celebrates the first anniversary of his stunning election victory, things could hardly have gone worse for Sir Keir Starmer. He would probably like to erase this year and do things entirely differently.

He will likely perform a reshuffle of his Cabinet now, with the obvious victim of any change being his Chancellor of the Exchequer. By almost every margin imaginable, Rachel Reeves has been a disaster as Chancellor, even if Starmer has been forced to fire the bullets that she has provided.

She was almost engulfed in a personal scandal concerning clear untruths in her CV, followed by an expenses investigation at one of her former employers.

As MPs move closer to their summer recess, the Prime Minister will still be hard at work dealing with the myriad of issues that he still faces, not the least of which is the 40% increase in the number of undocumented migrants who are crossing the English Channel which has now reached almost 20K in the past year.

This Government needs a complete review of its strategy, as it has become clear that they won the election based upon voters wanting “anyone but the Tories”.

The pound made another fresh high yesterday as traders ignored the turmoil in the House of Commons. It reached a high of 1.3788 but fell back to close at 1.3748.

The newest Job Openings and Labour Turnover Survey (JOLTS) data shows that job openings came in ahead of economists' expectations, with 7.77 million jobs added to the US economy.

In the manufacturing sector, the Institute for Supply Management's (ISM) latest manufacturing Purchasing Manager's Index (PMI) showed continued contraction, though less significant than expected.

While almost every piece of positive data that is published represents another thorn in the side of Donald Trump, as it gives the Federal Reserve more reasons not to cut interest rates, there was a little relief for the President from Fed Chair, Jerome Powell who opened the door a possible rate cut at the FOMC meeting that is scheduled for August.

The embattled head of the US Federal Reserve has refused to rule out an interest rate cut this month after coming under sustained attack from President Trump over monetary policy.

Jerome Powell, chairman of the US central bank, said an interest rate cut in July was neither “on nor off the table” in his most dovish comments about monetary loosening so far. Powell has come under fire from Trump, who has called him a “fool” and a “numbskull” after the Fed has kept interest rates on hold this year while other authorities have cut rates.

Powell said the Fed was taking its decisions “in a completely non-political way. We stay out of issues that are not our bailiwick.” Traders increased their bets on a quarter percentage point interest rate cut at the Fed’s next meeting on July 30 from the present 4.25 to 4.50 per cent. Powell’s comments are a break from his insistence that the central bank was in a comfortable “wait and see” position as it assesses the inflationary consequences of the White House’s tariff policies.

Threats against Powell have thrown the independence of the Fed into question and led investors to question the “safe” reserve currency status of the dollar and US government bonds. The dollar has suffered its worst start to a year since 1973.

Monetary policy has, for now, been taken out of the equation regarding currency strength, as the dollar has plummeted while the Euro has soared.

Expectations for the headline non-farm payrolls data, which is due for release tomorrow due to the Independence Day Holiday on Friday, remain subdued. The average prediction is for 110k new jobs to have been created in June. It is unclear if this will be sufficient for the Fed to cut rates. A lot will depend on the PCE inflation numbers due for release next week.

The dollar index lost ground again yesterday as traders looked forward with concern to July 9th, when the temporary pause on the introduction of tariffs expires. It fell to a low of 96.38 and closed at 98.64

ECB President Christine Lagarde exposed her lack of an “economist's mind” yesterday, when she told her audience in Sintra, Portugal, that the Euro doesn't just reflect market conditions but also the strength of the Eurozone's economy.

Lagarde went on to say, on inflation, "I'm not saying mission accomplished, but I say target reached." Lagarde noted the Central Bank has reached its 2% target on inflation, but must remain vigilant as it faces a lot of uncertainty.

The European Central Bank may not have all the information it needs, including on the trade outlook, by September, making any interest rate cut more likely to come later in the year, ECB policymaker Gediminas Šimkus told Reuters. After cutting interest rates seven times in a row as inflation fell, the ECB has hinted at a pause at its next meeting so it can wait for the fog surrounding trade negotiations between the Eurozone and the United States to clear.

Eurozone inflation just touched 2% in June, bumping back up from May's 1.9% and landing right on the European Central Bank's medium-term target. It's a symbolic milestone, but also a tricky one.

After a series of rate cuts that brought borrowing costs down to 2%, the ECB now looks likely to pause.

Lagarde recently acknowledged the Central Bank is “in a good position to navigate the uncertain conditions” and hinted “we could be nearing the end of the current rate-cutting cycle”. Markets seem to agree. Expectations are building around a holding pattern in July, with only one more potential trim priced in for the rest of the year.

The Euro’s current bout of strength also gives the ECB a bit of breathing space, perhaps, to wait and watch rather than rush more rate moves. Still, investors are watching the balance carefully. Currency strength might be cooling headline inflation, but it doesn't insulate the region from the wild swings in global energy markets.

Caution must become the watchword for Central Banks as they come towards the end of their current policy cycle.

Oil prices spiked as much as 26% in June after Israel bombed Iran, hitting year-to-date highs. But the rally faded fast after the US brokered a ceasefire.

The episode served as a stark reminder that any flare-up in the Middle East could throw a wrench in the ECB's plans. If oil volatility returns or energy prices surge again, inflation could bounce back, and the rate path might shift just as quickly. For now, investors are left studying every signal, trying to map out a policy path that's becoming anything but predictable.

Following Donald Trump’s return to the White House, no one could have predicted the significant fall in the value of the dollar, particularly in light of his MAGA rhetoric, but it was clear that something had to give, given his comments about America being taken advantage of.

The European Union is taking any trade talks “to the wire” with the temporary pause in tariffs expiring in a week’s time.

The euro continues its “merry march” towards 1.20, but before that, there could be a significant correction since its oversold condition is being stretched to the limit.

Yesterday, the single currency reached a high of 1.1830 and closed at 1.1808 as day traders took profits on long positions.

Have a great day!