Market overview

Energy is back at the centre of the FX story. Oil prices have jumped after hopes of a near-term Middle East peace deal faded, reviving concerns over inflation, growth and the policy outlook. For markets, the key question is no longer simply whether crude rises further, but how quickly higher energy costs feed into rates, risk appetite and relative growth expectations.

The dollar has started the week on stronger ground, helped by firmer yields and the US economy’s relative insulation from the commodity shock. Risk appetite remains resilient, with equities close to record highs and volatility contained, which has so far prevented a broader rush into defensive dollar positions. Still, if the oil shock proves persistent, the balance of risks points to a more supportive backdrop for the USD.

USD: CPI carries the next catalyst

The focus now turns to US inflation. Today’s CPI release is expected to show headline prices accelerating to 0.6% month-on-month and 3.7% year-on-year, with core inflation also forecast to firm. An upside surprise would likely push Fed pricing higher and give the dollar fresh support through the rates channel.

The labour market remains firm and unemployment is low, leaving the Federal Reserve with limited room to sound relaxed. Markets have already moved back towards pricing the possibility of Fed hikes later this year. Comments from Neel Kashkari and Beth Hammack, both associated with the hawkish dissent at the April FOMC meeting, will therefore be closely watched.

For now, we struggle to see a sustained dollar sell-off while the full stagflationary impact of higher energy prices is still filtering through. DXY may continue to trade around the 98.00 to 98.50 area, while USD/JPY could grind back towards 158, even with US Treasury Secretary Scott Bessent in Japan and likely to offer verbal support for Tokyo’s FX intervention stance.

GBP: political risk returns, but no sterling panic

Sterling is carrying a heavier tone, but there is little sign of disorder. Prime Minister Keir Starmer’s attempt to reset the agenda after Labour’s weak local election results failed to impress markets, while pressure inside the party has clearly intensified. Several Labour MPs have now called for him to step aside, and speculation over possible successors has grown.

Even so, investors have become familiar with UK political instability, which raises the bar for a sharp currency reaction. Potential challengers may also be reluctant to move too early given the fragile geopolitical backdrop and the absence of an obvious consensus alternative. That helps explain why GBP has avoided a deeper sell-off.

The gilt market is showing more unease. UK yields have risen more sharply than many peers, suggesting investors are demanding a domestic risk premium as well as reacting to the global oil move. Politics does matter, but sterling may now take its cue more from the macro data. Tomorrow’s Q1 GDP release will be an important test, particularly if recent positive momentum is to keep worst-case political and currency scenarios off the table.

EUR: 1.18 remains a difficult ceiling

The euro is starting to look tired. EUR/USD has repeatedly failed to hold above 1.18, with ceasefire-related rallies fading quickly. The pair remains above key daily moving averages, but short-term momentum is weakening. A sustained close below the 200-day moving average near 1.1680 would increase the risk of a deeper pullback.

Positioning still offers some support, as long USD exposure can be reduced on de-escalation headlines. However, each false start makes that impulse less powerful. Even a genuine peace deal would not necessarily create a lasting euro-positive story. The ECB has yet to move, rate differentials still favour the dollar, and the EU-US trade backdrop remains unresolved.

The policy mix is also less helpful for the single currency. Three ECB hikes are already priced for this year, leaving limited room for a positive surprise. If markets shift back towards fundamentals, the stronger catalyst is more likely to come from the US side, either through Fed repricing or renewed haven demand. Today’s ZEW surveys will therefore be watched closely after April’s sharp deterioration in German and Eurozone sentiment.

Looking ahead

• US CPI is the main event, with any upside surprise likely to support the dollar through higher Fed rate expectations.
• Fed speakers Kashkari and Hammack may reinforce the central bank’s cautious tone if inflation remains sticky.
• US PPI and retail sales later this week will help test whether price pressure and consumer resilience are still intact.
• UK Q1 GDP will be key for sterling, especially as political pressure on Starmer builds.
• Eurozone ZEW surveys could expose renewed downside risks for EUR/USD if sentiment weakens again.