3 September 2025: Starmer insists his relationship with Reeves is as strong as ever

The pound saw its largest one-day fall this year yesterday as traders were spooked by the rise in public sector borrowing. The UK’s cost of borrowing has risen to a 27-year high, eclipsing even the level it reached following the ill-fated mini budget that Liz Truss introduced when she briefly became Prime Minister.

The yield on 30-year Government bonds jumped to 5.72% making it significantly more expensive for the Treasury to borrow funds. Interest payments were already a significant daily expense and they will now increase while rates remain at their current level. Interest payment on debt service was £7 billion in July alone.

There are rising expectations that the Chancellor, Rachel Reeves, will increase taxes when she presents her budget to Parliament later this year to meet her borrowing and spending rules as worries continue to grow about the state of the Government’s finances.

The UK is not alone in this. Other European countries have seen new records set in the past few days. The difference is that in the UK, the Chancellor has chosen to impose self-inflicted limits on borrowing, effectively tying her own hands when deciding how to balance the books.

Rates on shorter duration bonds like the 10-year have also risen but remain below the level that was reached in January.

Coming hot on the heels of the shake up of ten Prime Minister’s team of No.10 advisers, the pressure on Reeves is gradually rising. Despite this, Sir Keir Starmer said yesterday that his relationship with his Chancellor is as strong as ever. While this loyalty would be admirable in certain situations, it will be interesting to see how far he is prepared to let Reeves’ popularity rating fall, before pulling the plug.

There is a feeling around Westminster that Starmer;s promotion of Darren Jones, who was Reeves number two at the Treasury, may be in preparation for his further elevation to no.11 Downing Street.

UK business confidence has experienced a two-point increase to 54% in August, according to the latest Lloyds Business Barometer.

It marks the fourth consecutive monthly rise, driven by a five-point increase in trading prospects confidence, reaching its highest level since 2014 at 63%. Despite this upward trend in confidence, economic optimism has seen a slight decline, dropping three points to 44%. Nevertheless, this figure remains above the long-term average of 19% still in no small part to the change of Government given how far and how fast Rishi Sunak’s Government fell,

This continued upward trend in business confidence suggests UK firms remain optimistic about their own trading prospects, while there is a modest cooling of confidence in the wider UK economy.

The pound fell to a low of 1.3340 yesterday and closed at 1.3394 as volatility returned to the market. Traders' confidence that the Chancellor has either the tools or the wherewithal to deal with a growing crisis has been damaged, perhaps irretrievably.

Donald Trump’s inner team have begun to rally round their President as he is being attacked on several fronts. It is typical of the man and those he chooses to surround himself with, that they have “come out swinging”.

First Treasury Secretary Scott Bessent told Fox News, Trump’s number one supporter amongst the media, that he is preparing a brief for the Supreme Court to defend against the idea that the President does not have the authority to impose tariffs on America’s trading partners and that he has stepped into territory that rightfully is under the jurisdiction of Congress.

This comes in the wake of a Federal appeals court ruling that the tariffs exceed the President’s emergency powers. Despite this ruling, the tariffs remain in place as the Administration prepares to appeal to the Supreme Court. The administration has until Oct. 14 to initiate its appeal.

Bessent expressed confidence that the Supreme Court would ultimately rule in favour of the President. He argued that the ongoing trade deficits could lead to an unsustainable equilibrium, potentially causing financial instability. The Treasury Secretary suggested that the U.S. economy is approaching a “tipping point.”

“The President using his emergency powers to truncate a financial crisis? What if someone had done that for housing in '05 or '06?" Bessent reflected.

Bill Pulte, the man who “discovered” Lisa Cook’s alleged mortgage fraud, has suddenly leapt to the front and centre of Trump’s “supporters club”.

Pulte is the director of the Federal Housing Finance Agency, or FHFA under President Donald Trump, serving in a role that gives him regulatory authority over the country's mortgage industry. He's been using that authority in unusual ways, including getting involved in Trump's clashes with the Federal Reserve.

Pulte has been an outspoken critic of Federal Reserve Chair Jerome Powell, has called on him to resign, and reportedly drafted the letter that Trump would use to fire Powell.

Meanwhile, one of the world’s most prominent hedge fund billionaires has warned that rising inequality is turning the US into an autocratic state and condemned business leaders for failing to speak out against Donald Trump’s policies.

Ray Dalio, the founder of Bridgewater Associates, said “gaps in wealth” and a collapse in trust were driving “more extreme” policies in the US. Speaking to the Financial Times, the veteran financier said many western countries were affected by growing inequality, leading voters to turn increasingly to autocratic leaders.

Following Monday’s Labour Day holiday, volatility has returned to the financial markets with ferocity. Yesterday, the dollar index climbed to a high of 98.59 and closed at 98.33. It is unlikely that the Greenback is “out of the woods” but it has regained a level of composure that has been missing in recent weeks.

Inflation has remained steady in the Eurozone, providing encouragement for the ECB to remain vigilant during the coming months as its pause in rate cuts continues.

While the annual inflation rate in the Eurozone jumped to 2.1% in August, surpassing the target set by the European Central Bank at 2% for the first time since April, there is no pressure on the Central Bank to act. The increase was entirely due to seasonal factors, which will not concern even the most hawkish member of the Governing Council.

The preliminary reading, which exceeded economists' expectations in a Reuters survey of 2%, showed core inflation stable at 2.3%, the same level as July, noting that this measure excludes prices of more volatile items such as food, energy, alcohol, and tobacco.

In other details, service price inflation, a closely monitored indicator, slightly decreased to 3.1% in August compared to 3.2% in the previous month.

This comes at a time when the decision of the European Central Bank's monetary policymakers varies, after they adopted a "wait and see" approach during their last meeting in July, keeping interest rates unchanged at 2%. The Bank had previously cut borrowing costs by 200 basis points in stages that began in June 2024.

Traders have lowered their expectations for further interest rate cuts since the European Union signed a trade agreement with the United States in late July. Derivative contracts, according, indicate that the odds of another quarter-point cut by March have become equal as the balance of risks have become roughly equal.

Recently, policymakers at the European Central Bank have sent mixed signals regarding inflation risks. On one hand, Olli Rehn, the governor of the Bank of Finland, stated in remarks to the Financial Times over the weekend that inflation risks "trend to the downside," pointing to "declining energy prices, a strong euro, and reduced inflation pressures in the services sector."

In contrast, Isabel Schnabel, a member of the Executive Board of the European Central Bank, told Reuters on Tuesday that the "balance of risks" has become "tilted to the upside," reflecting a state of uncertainty surrounding the future trajectory of the economy.

On balance, after such a long run of monetary easing, it would be natural for any G7 Central Bank to want to review the progress of its actions.

Following the announcement of the data, the euro remained relatively stable after being weak prior to its release, declining by 0.5% during today's trading to 1.1640.

Have a great day!