Sterling stages a comeback on weaker Dollar and renewed risk appetite
The pound has staged a notable recovery, climbing back above $1.33 after slipping below $1.32 earlier in the week. This rebound followed lower-than-forecast US inflation data, which weighed on the dollar and allowed sterling to reclaim ground. GBP/USD is now eyeing its 21-day moving average, a move that may reinforce the currency’s upward trajectory since its January low near $1.21. A string of further disappointments in US economic data could offer sterling additional momentum, building on its 6% rise since the start of the year.
Against the euro, the pound also gained ground, with GBP/EUR briefly pushing through the €1.19 level. Diminished market volatility and an upswing in global risk sentiment have favoured the pound, which tends to perform better in such conditions due to its higher sensitivity to risk. A sustained risk-on environment could propel GBP/EUR further, but key resistance levels remain, including the 200-day moving average at €1.1925. Clearing these technical barriers would strengthen the case for a return towards the €1.20 mark.
Although UK economic growth is still on shaky ground, fears of a recession are beginning to ease. The Bank of England, for its part, has maintained a measured tone, steering clear of any abrupt policy pivots. Should currency markets begin to re-centre their focus on interest rate differentials, the yield gap between the UK and the eurozone could continue to support sterling. Moreover, the recent US-UK trade agreement, which grants Britain some breathing room on tariffs, has offered a further boost to investor sentiment toward the pound.
Signs of cooling in US inflation stir hopes for Fed policy shift
US consumer prices showed a smaller-than-expected increase in April, with the monthly rise limited to just 0.2%. This pulled annual headline inflation down to 2.3% – the lowest level since early 2021. Core inflation, which excludes more volatile components, held steady at 2.8%. The overall picture suggests diminishing inflationary pressures, with businesses so far showing little inclination to pass higher import tariffs onto consumers.
Given that services comprise the bulk of the US inflation basket, tariffs affecting goods – which account for under 20% of the index – are having a muted effect, at least for now. Softer trends in housing and service prices are also helping to contain broader inflation. This was echoed in the latest NFIB small business survey, which highlighted a fall in the number of firms planning price hikes, further reinforcing the idea that inflation could continue to moderate. While the full effect of recent tariffs may not yet be visible, the softer inflation trajectory is fuelling speculation that the Federal Reserve could begin cutting interest rates sooner than previously expected.
The US dollar, meanwhile, has pulled back after hitting resistance at its 50-week moving average, suggesting that the recent rally may be running out of steam. Yet higher Treasury yields point to lingering investor caution, as markets await clearer evidence on how tariffs will affect inflation through the summer months. The Fed’s patient stance has helped keep the dollar supported via the yield channel, but this could quickly reverse if upcoming data shows further weakening in core inflation.
Euro finds its footing as confidence in German outlook climbs
The euro has regained ground, trading just below the $1.12 level, after rebounding from a sharp 1.5% slide earlier in the week. The recovery was driven by a combination of upbeat German economic sentiment and a weaker-than-anticipated reading on US inflation, prompting investors to reassess the euro’s short-term prospects.
Germany’s ZEW Economic Sentiment Index delivered a striking improvement in May, leaping to 25.2 from April’s deeply negative -14 and comfortably beating market forecasts. The jump reflects rising optimism around economic stabilisation, government clarity, and progress on trade matters. Nearly 30% of surveyed analysts now anticipate a pick-up in economic activity, as inflation appears more contained and the outlook for tariffs softens. While the European Union remains locked in negotiations with the US administration, contingency plans are in place for retaliatory measures covering €95 billion in American goods if diplomacy falters.
From a technical perspective, the EUR/USD pair has found support near its 50-day moving average, while momentum signals—such as the 14-day relative strength index—hover close to neutral territory. This suggests selling pressure may be fading. Improving economic prospects within Europe, coupled with relatively low inflation risks, could attract renewed interest from global investors, especially given limited exposure to the region in current US portfolios.
The current environment may offer a favourable entry point for a shift towards European markets. If economic data continues to exceed expectations, the euro could see ongoing demand as confidence builds in the bloc’s recovery.
Looking ahead
Investors will now turn their attention to this week’s US retail sales and US producer price figures for fresh clues on the state of the US economy and the likely direction of monetary policy.
Attention in both the UK and eurozone is turning towards next week’s key diplomatic gathering, as leaders prepare for a UK-EU summit scheduled for the 19th of May. The European Council has outlined a wide-ranging agenda, covering defence cooperation, internal security, criminal justice, food safety standards, emissions trading, migration, and youth mobility. The scope of discussions suggests a shift towards a more comprehensive partnership between the two sides, potentially laying the groundwork for a refreshed framework of cooperation. Currency strategists note that such developments could offer meaningful support to the UK’s economic prospects and lend further strength to the Pound, particularly if the talks foster greater policy alignment and reduce post-Brexit friction.
Global financial markets are likely to stay sensitive to the evolving landscape of trade tariffs and geopolitical flashpoints. These factors have the potential to trigger renewed demand for safe-haven assets, influencing currency movements and steering foreign exchange trends in unpredictable directions.
