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GBP - Political risk returns to the forefront
Sterling opened the week on softer footing as markets continue to assess the implications of last week’s UK local election results. While Labour’s performance avoided the worst-case scenario priced into parts of the market, it has done little to suppress growing discussion around leadership stability and the broader ideological direction of the government.
Attention is increasingly shifting toward potential succession dynamics within the Labour Party, with Manchester Mayor Andy Burnham remaining a closely watched figure. Markets are likely to react swiftly to any developments suggesting a formal return to Westminster politics, particularly if accompanied by a parliamentary vacancy or broader cabinet unrest.
This morning’s focus centres on Prime Minister Keir Starmer’s policy address, where investors will look for a clearer framework on restoring political momentum ahead of the next electoral cycle. Of particular relevance to FX markets will be any indication of a recalibration in the UK’s European positioning, including closer alignment with the customs union or, more controversially, renewed single market discussions.
For now, political uncertainty remains a modest headwind for Sterling, with GBP/EUR continuing to find resistance toward the lower end of recent ranges.
Major Weekly Data:
Thursday 14th May
7:00am - GDP m/m & Prelim GDP q/q
EUR - ECB expectations continue to support the Euro
The Euro has remained relatively resilient against the Dollar, supported primarily by the broader pro-risk backdrop and continued softness in the USD environment. Strength across Asian technology markets, particularly Korea and Taiwan, alongside sustained Yuan appreciation through the ¥6.800 level, has reinforced demand for risk-sensitive and emerging market currencies more broadly.
Domestically, however, the Eurozone growth picture remains subdued. Recent activity data has underwhelmed, leaving expectations for further European Central Bank tightening as the principal support mechanism for the single currency.
With energy prices remaining elevated, ECB officials are expected to maintain a hawkish communication stance this week. Speeches from Christine Lagarde and Philip Lane on Wednesday may further reinforce market expectations for a 25bp rate increase at the 11 June meeting, currently priced with high conviction by rates markets.
Absent a material geopolitical breakthrough or significant deterioration in US inflation data, EUR/USD may struggle to establish a sustained move beyond $1.1800 in the near term. Current market positioning continues to favour range-bound consolidation, with downside risks linked to firmer US inflation expectations and renewed Fed repricing.
No Major Weekly Data
USD - Inflation and energy markets drive Dollar sentiment
The Dollar began the week firmer as geopolitical tensions and inflation concerns regained prominence. Optimism surrounding a potential Middle East breakthrough ahead of President Trump’s upcoming visit to China has faded following the rejection of Iran’s latest proposal, reinforcing market expectations for continued energy market disruption and elevated oil prices.
Attention will now turn to Wednesday’s International Energy Agency Oil Market Report, where investors will closely monitor commentary surrounding global supply conditions and the risk of further structural tightness in energy markets.
The macroeconomic focus this week, however, remains firmly on US inflation data. Tomorrow’s April CPI release is expected to show headline inflation accelerating to 3.7% year-on-year, with core inflation also edging higher. Combined with a labour market that continues to demonstrate resilience, the data is likely to reinforce the Federal Reserve’s cautious stance on rate cuts.
Markets have already begun repricing the possibility of additional Fed tightening later this year, particularly as inflationary pressures tied to energy and supply chains remain persistent. Commentary this week from Fed officials Neel Kashkari and Beth Hammack, both viewed as among the more hawkish voices within the FOMC, will be monitored closely for confirmation of that shift.
Additional releases including PPI and Retail Sales later this week will further shape expectations around the durability of US consumer demand and broader economic momentum.
Against this backdrop, the Dollar’s broader support profile remains intact. Markets continue to favour defensive positioning while stagflationary risks remain unresolved, with DXY expected to remain supported near recent ranges and USD/JPY continuing to edge higher despite ongoing Japanese intervention rhetoric.
Major Weekly Data:
Tuesday 12th May
1:30pm - Core CPI m/m, CPI m/m & CPI y/y
Tentative - Fed Chair Nomination Vote
Wednesday 13th May
1:30pm - Core PPI m/m & PPI m/m
Thursday 14th May
1:30pm - Core Retail Sales m/m, Retail Sales m/m & Unemployment Claims
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