Market overview

A punchy US inflation mix has put the dollar back on firmer footing. April PPI landed well above expectations, adding to the hotter CPI print and resilient labour market data seen over recent sessions. The result is a cleaner hawkish repricing of the Fed path, with markets now attaching little probability to any easing this year.

Geopolitics remains the main swing factor. The conflict is now feeding more visibly into macro data, particularly through energy and transport costs, making central bank expectations increasingly sensitive to each incoming release. Risk sentiment remains soft, but not disorderly, leaving the dollar supported rather than aggressively bid.

Today’s Trump-Xi meeting in China is the key event risk. Markets will be watching for signals on trade, rare earths and, more importantly, whether China is willing to use its influence over Iran to help steer negotiations towards a settlement. Constructive headlines from Beijing could cap dollar upside, while a lack of progress on Gulf negotiations would strengthen the case for further USD gains.

USD: Hot PPI keeps the dollar supported

The US PPI report was a clear upside surprise. Headline producer prices rose 1.4% month on month, far above the 0.5% consensus, while core PPI increased 1.0%, compared with expectations of 0.3%. On an annual basis, wholesale inflation rose 6%, its fastest pace since 2022.

The details were not uniformly alarming. Airfares were a major contributor, rising 3% on the month, while the components that feed into the Fed’s preferred core PCE measure were more contained. Even so, the print is uncomfortable for the Fed and has nudged December pricing above 10bp of tightening.

Treasuries have reacted, but without signs of disorder. The 10-year yield is close to its highest level since July, while breakeven rates remain relatively contained, with the 10-year around 2.5% and the 2-year near 3%. That suggests a bond market that is adjusting rather than panicking.

For FX, higher yields should remain dollar-positive, unlike in 2025 when fiscal concerns diluted the support from rising rates. The DXY is likely to continue trading around its 200-day moving average near 98.50 for now. A more decisive upside break may require either a deterioration in the geopolitical backdrop or a less conciliatory tone from the US-China summit.

GBP: Political noise returns, but GDP offers some cover

Sterling has had to contend with renewed Westminster uncertainty. Reports that Health Secretary Wes Streeting could resign and launch a leadership challenge against Keir Starmer have revived questions over the UK political outlook. The pound’s relatively calm reaction suggests investors do not currently view Streeting as a major market threat, partly because he is seen as more fiscally disciplined than some potential alternatives.

The bigger sensitivity may lie elsewhere. Angela Rayner, now cleared by HMRC over her tax affairs, could be viewed as a more left-leaning contender if a leadership contest develops. That risk appears to have caught some attention in early London trading, with sterling softening modestly across the board.

For now, the market reaction remains contained. A formal challenge from Streeting would likely bring more volatility, particularly if it opened the door to a wider contest. Without that, GBP/EUR downside may be limited, with buying interest recently emerging around 1.1520 to 1.1530.

On the data front, first-quarter GDP rose 0.6% quarter on quarter, in line with expectations, while March output beat consensus at 0.3% month on month. We remain cautious about reading too much into the figures, given the tendency for first-quarter growth to outperform the rest of the year since 2022, which points to possible seasonal adjustment distortions.

EUR: Risk sentiment and growth doubts weigh

The euro remains under pressure against the dollar, with EUR/USD trading close to its 100-day moving average just above 1.17. Geopolitics continues to dominate price action, with the rejection of rival US and Iranian proposals earlier this week denting confidence in a near-term resolution.

The euro remains vulnerable while the Strait of Hormuz disruption risk persists. Any prolonged energy shock would hit the eurozone’s energy-intensive economy harder than the US, making the ECB’s hawkish pivot more difficult to sustain relative to the Fed.

The data are already pointing in that direction. Germany’s ZEW expectations index improved slightly in May but remains negative, signalling fragile confidence. Eurozone GDP expanded only 0.1% in the first quarter, the weakest pace since mid-2025, while rising unemployment in France and Germany suggests labour market momentum is fading.

The contrast with the US remains stark. US employment and inflation data continue to support a more resilient macro narrative, raising the risk that rate differentials move back in the dollar’s favour. EUR/USD still has some technical support, but both sentiment and fundamentals are starting to lean against the single currency.

Looking ahead

• Trump-Xi headlines will be the main driver for risk appetite and dollar direction.
• Any signal that China may pressure Iran towards a deal would likely support risk assets and limit USD upside.
• A lack of progress on Gulf negotiations would point to renewed dollar strength.
• US rates remain central, with markets watching whether 10-year yields can sustain a move above 4.50%.
• Sterling risk hinges on whether UK leadership speculation becomes a formal challenge.
• EUR/USD remains exposed to weaker risk sentiment, energy disruption and renewed US-eurozone rate divergence.