Sterling moved lower at the start of the week as investors weighed the stalled ceasefire negotiations in the Middle East and prepared for a pivotal week of US economic data. Domestic political uncertainty in the UK following last week’s local elections also compounded downward pressure on the pound.
As of 07:10 ET (11:10 GMT), the GBP/USD rate was quoted down 0.18% at 1.3609, while EUR/USD was 0.11% lower at 1.1773.
The US dollar gained modestly on Monday after weekend developments dashed hopes of a ceasefire deal ahead of US President Donald Trump’s visit to China, scheduled to begin Thursday. Mr. Trump described Iran’s most recent proposal as "totally unacceptable", curbing optimism that had been building during the prior week. Oil prices moved higher and equity markets were called slightly lower as risk appetite contracted.
ING commented that unless an unlikely breakthrough is brokered by Beijing, markets would continue to price for an impasse. That outcome, ING said, would keep oil prices elevated and feed a broader wave of global inflationary pressure. The brokerage also warned that the full force of the stagflationary shock had not yet been realised, making a sustained dollar selloff hard to justify. ING suggested the DXY index was likely to consolidate in a 98.00-98.50 range in the near term.
The economic calendar is dominated by Tuesday’s US consumer price index (CPI) report for April. Consensus expectations see headline inflation rising to 3.7% year-on-year from 3.3%, and core inflation edging up to 2.7% from 2.6%. Money markets have begun to shift back toward pricing in the possibility of further Federal Reserve rate hikes later this year.
Two of the three recent FOMC dissenters, Neel Kashkari and Beth Hammack, are scheduled to speak this week. ING noted that a stronger-than-expected inflation print could sustain dollar demand. Additional US data due this week include producer price index (PPI) figures on Wednesday and April retail sales on Thursday, rounding out a busy domestic schedule.
Sterling faced a second source of pressure at home. The fallout from local council election results has intensified speculation about a possible Labour leadership contest, and reports indicate Manchester Mayor Andy Burnham is watching closely for any indication of a return to parliament. The immediate political focus is a policy address from Prime Minister Keir Starmer, with analysts highlighting the question of closer ties to Europe - potentially via the customs union or re-entry to the single market - as a key wildcard for markets.
ING cautioned that sterling and gilts had entered the week with relatively little political risk priced in, leaving the currency vulnerable if uncertainty widens.
For the euro, ING observed that EUR/USD had been supported by a softer dollar and pro-risk flows from Asia, but that the underlying outlook for the single currency remained less constructive given disappointing activity data. The brokerage said only the prospect of European Central Bank tightening this summer - with an 82% probability attached to a 25 basis point move on June 11 - was preventing a slide back toward 1.15.
ECB President Christine Lagarde and ECB chief economist Philip Lane are both scheduled to speak on Wednesday. ING concluded that, in the absence of a breakthrough on a peace deal, the greater near-term risk for EUR/USD was a move below 1.1700 rather than a break above 1.18.
Market context and near-term watchlist
- Geopolitics: Continued deadlock in Middle East ceasefire negotiations is supporting oil prices and boosting inflation risk premia.
- US data: Tuesday’s CPI print is a key event for global rates and FX positioning, followed by PPI and retail sales later in the week.
- UK politics: Local election fallout and a high-profile policy speech from the prime minister are potential triggers for increased sterling and gilt volatility.
- Central bank signals: Speeches from US and ECB officials could influence expectations for policy moves and therefore currency flows.