Market overview

FX markets remain range-bound overall, with the dollar broadly steady after Kevin Warsh’s Senate hearing failed to trigger any meaningful repricing in rates or risk. His defence of Fed independence helped limit downside in Treasuries and USD, while the lack of policy clarity kept volatility contained. Pound sterling is the clearer mover in G10 this morning, extending gains after a firmer-than-expected UK inflation print reinforced the higher-for-longer rates narrative.

Beyond the hearing, price action still points to a market unwilling to chase strong conviction in either direction. USD pairs continue to draw some support from hopes of de-escalation after President Trump’s last-minute ceasefire extension, but uncertainty around the Strait of Hormuz is keeping that optimism in check. In that setting, sterling is finding relative support from domestic data, while EUR/USD remains broadly anchored rather than breaking decisively lower.

The wider backdrop is still not delivering a clean dollar impulse. Equities have remained resilient, with the S&P 500 up around 3% since the conflict began and the MSCI World also higher, limiting defensive demand for the greenback. In that setting, DXY may struggle to stage a sustained return towards 99.0.

USD: Steady, but still missing a cleaner bullish trigger

The dollar came through Warsh’s testimony largely unscathed. Markets found enough reassurance in his support for Fed independence to avoid any Treasury or USD sell-off, while his refusal to offer meaningful policy guidance left rate expectations broadly unchanged. His call for a “new framework” may point to balance sheet policy, but the lack of detail meant little immediate market impact. His AI-led productivity argument and scepticism towards forward guidance were also noted, without shifting pricing materially.

The more relevant issue remains political. Warsh’s confirmation still appears to depend heavily on Senator Thom Tillis and the handling of the Powell probe. A transfer of the investigation from the Department of Justice to Congress remains a possible compromise. There is still a meaningful chance Warsh is not confirmed before the 15 May term expiry, but that should not matter much for markets provided he is in place before the 17 June FOMC meeting.

The data backdrop offers only limited support. March retail sales were firm, and ADP payrolls posted a second consecutive strong weekly increase. The four-week moving average has now risen to 54.75k, a pace consistent with monthly job growth comfortably above 200k. Even so, markets are unlikely to place too much weight on that signal given the loose link between ADP’s weekly series, non-farm payrolls and ADP’s own monthly release. Without a weaker equity backdrop, the dollar still lacks the catalyst for a more durable rebound.

GBP: Inflation keeps the Bank cautious and sterling supported

Sterling remains underpinned by a UK inflation profile that is still too firm to allow the Bank of England any near-term room to ease. Services CPI rose 4.5% in March, above the 4.3% consensus and up from 4.3% in February. Headline CPI also accelerated to 3.3% from 3.0%, largely as expected given the rise in oil prices.

For the Bank, the key issue is not the energy-driven lift in headline inflation but the persistence of domestic price pressure. Services and core inflation matter more, as these are the components most responsive to monetary policy. On that front, the upside surprise in services inflation will be uncomfortable, even if core CPI edged down to 3.1% from 3.2%.

The overall message is still one of restrictive policy for longer. Recent GDP and labour market data have also been firmer than expected, reinforcing the case for a prolonged hold. For sterling, that remains supportive. GBP/EUR rose to 1.1509, effectively the April high, and attention now turns to whether that level can be cleared decisively. GBP/USD is also modestly firmer and continues to hold above 1.3480, although global risk sentiment remains the bigger driver there.

There may be some caution on the crosses. EUR/GBP has already broken below 0.870, and further downside may be more limited from here. Risk-positive sessions can still weigh on the pair, but rate differentials tend to be the more durable driver. In that context, the 41bp of tightening priced into the GBP curve looks somewhat rich relative to the 54bp priced for the ECB. Political risk may also return to the foreground after the 7 May local elections if Labour performs poorly.

EUR: Softer tone, with rates no longer offering the same support

The euro traded with a softer bias after a larger-than-expected fall in the ZEW survey, although markets remain aware that these sentiment indicators can recover quickly if geopolitical tensions ease. For now, the single currency is still being held up by reasonably resilient risk appetite, but the support from front-end rates has weakened.

The two-year EUR:USD swap differential has moved 25bp back in the dollar’s favour since the 7 April peak. While headline risk continues to generate volatile pricing, Lagarde’s apparent pushback against an April hike has encouraged greater caution around pricing more than two ECB hikes this year.

That leaves EUR/USD in a fairly well-defined range. Sustained progress on both the military front and Hormuz would likely be needed to keep the pair above 1.180. Failing that, markets still look comfortable with an optimism-leaning range around 1.172 to 1.177. Dip-buying should remain in place in the 1.167 to 1.170 area unless diplomacy breaks down more decisively, in which case downside risks below 1.160 would come back into view.

Looking ahead

• US data are light, leaving geopolitics and risk sentiment as the main near-term drivers for the dollar.
• Warsh’s confirmation process remains more important for markets than anything said in yesterday’s hearing.
• In the UK, services inflation should keep the BoE firmly on hold, with Friday’s Decision Maker Panel the next key domestic release.
• For EUR/USD, 1.180 remains the key topside level, while 1.167 to 1.170 should continue to attract dip-buying unless the diplomatic backdrop worsens sharply.
• Across G10 FX, a more convincing dollar rebound still looks difficult without weaker equities or a broader deterioration in risk sentiment.