Sterling sank to a one-month low against the dollar on Friday and the yield on 10-year U.K. gilts pushed back above 5.13 percent, as a fresh path opened for a Labour leadership challenge in London and Kevin Warsh took the reins at the Federal Reserve in Washington with the bond market pricing in tighter policy, not looser.

The twin moves extended a global selloff in government debt on a week when a Hormuz oil standoff and the highest U.S. inflation reading in nearly three years pushed traders to price out 2026 rate cuts and lift the odds of an outright hike.

What moved

The pound was last down 0.3 percent at $1.3363 in morning trading, according to CNBC, continuing a sustained slide over the past week. The yield on 10-year gilts, the benchmark for U.K. government debt, rose more than 1 basis point Friday to 5.137 percent, up from 5.03 percent on Wednesday.

In the United States, the two-year Treasury yield has climbed above the federal funds rate, a configuration Ed Yardeni, president of Yardeni Research, said in a Wednesday note shows traders no longer believe the Fed's current setting is tight enough. "The market is signaling that the current FFR is too low to curb inflation and may have to be hiked," Yardeni wrote. Fed funds futures, according to CMEGroup's FedWatch tool, now show no cuts for the rest of the year, and the implied probability of a hike has risen in recent days.

The Warsh handoff

Jerome Powell stepped down as Fed chair on Friday after eight years, handing the gavel to Warsh, President Trump's pick. In an unusual step, Powell will stay on as a Federal Reserve governor, citing continuing legal threats. "The institution is being battered over these things," Powell said at an April 29 press conference.

Warsh has promised a "regime change" at the central bank, language Wall Street has read as more hawkish than Trump, who has spent two terms pressing for cuts, may have bargained for. Yardeni told clients that a simple removal of the easing bias at the June Federal Open Market Committee meeting "may not be enough," given that inflation has run above the Fed's 2 percent target for five years.

The London angle

Gilts came under fresh pressure Friday after Josh Simons, Labour MP for Makerfield in north-west England, agreed to step aside and let Greater Manchester Mayor Andy Burnham contest the seat in a forthcoming by-election. An earlier Burnham bid to enter Parliament in January was blocked by allies of Prime Minister Keir Starmer, CNBC reported, and Friday's clearance gave the Labour rival a credible path to 10 Downing Street.

Polling cited by Elias Haddad, global head of markets strategy at BBH, shows 61 percent of Labour members favoring Burnham, against 28 percent for Starmer. Polymarket puts Burnham at 42 percent to become the next prime minister, versus 27 percent for Starmer. "Political uncertainty will continue to dominate the price action in GBP and gilts, with the bias skewed to the downside given worsening U.K. fiscal credibility," Haddad said. Burnham last year accused the U.K. government of "being in hock to the bond markets" and has floated 40 billion pounds in additional borrowing for housing and infrastructure.

Trump told reporters it will be "tough" for Starmer to survive politically without confronting immigration and energy policy.

The oil overlay

Crude prices spiked late Thursday after Trump told Fox News host Sean Hannity that Xi had agreed in Beijing to buy U.S. oil, with Chinese tankers soon loading in Texas, Louisiana and Alaska. Xi also told Trump he would not supply military equipment to Iran, the president said.

The counterpoint

Deutsche Bank analysts noted that Burnham has partially walked back his earlier bond-market broadsides, including a February comment that markets should not be ignored. Powell's defenders told CBS News the outgoing chair's biggest contribution may prove institutional: David Wessel of the Brookings Institution called Powell's "enduring legacy" his defense of "the Fed's independence at a time of unprecedented challenges," a posture Warsh's rhetoric calls into question.

The next test arrives in three weeks, when the FOMC meets in June for the first time under Warsh.