Market overview

Sterling has moved sharply onto the back foot, with broad-based losses against major currencies and a fall of more than 1% versus the dollar this week. GBP/USD has slipped from last week’s 1.3653 high into the low 1.33s, wiping out four weeks of gains and breaking below key daily moving averages. GBP/EUR has also turned lower after losing the 1.15 handle, leaving the near-term technical picture looking increasingly fragile.

The move is not only a dollar story. UK political risk is now being priced more visibly, with pressure building on Prime Minister Starmer and speculation growing around a possible Labour leadership contest. Wes Streeting’s resignation has added to the sense of instability, while talk of Andy Burnham as a potential successor raises market concerns over a looser fiscal approach. For now, sterling looks vulnerable until investors have greater clarity on both leadership and policy direction.

USD: Data and geopolitics keep the dollar bid

The dollar is on course for its strongest weekly gain in nine weeks, with the DXY up around 1.2% week to date. Support continues to come from elevated energy prices, limited progress in the Gulf, and a US economy that still appears more resilient than its peers.

The macro picture remains dollar-positive. April retail sales rose 0.5% month on month, suggesting higher fuel costs have not yet meaningfully slowed consumer demand. Jobless claims remain low, while import and export prices surprised to the upside, adding to a run of firm inflation data. Together, this strengthens the market’s more hawkish read on the Federal Reserve outlook and keeps US rates working in the dollar’s favour.

GBP: Sterling hit by politics and poor momentum

The pound is now trading with a clear domestic risk premium. While a stronger dollar has done much of the damage in GBP/USD, the broader nature of sterling’s decline points to a UK-specific concern as well.

Markets are watching whether political pressure turns into a formal leadership challenge. The potential return of Andy Burnham to Westminster would be particularly sensitive for gilts and FX, given the risk of a more expansive fiscal stance. Until investors can judge the likely policy path of any successor, sterling may struggle to find meaningful support. A sustained recovery now requires both political calm and a stabilisation in the technical picture.

EUR: Euro exposed as dollar strength broadens

EUR/USD has extended its decline, closing lower for a third straight session before softening again in Asia. The euro has found little support from recent geopolitical developments, while the dollar has benefited from a mix of firmer US data, improved trade tone and higher energy prices.

The break below the 1.1650 to 1.1660 area is technically significant, as this zone had attracted demand through April. Sellers may now feel encouraged by the combination of geopolitical uncertainty, US macro resilience and an ECB that markets view as less able to lean hawkish. For the euro to regain traction, attention may need to shift back towards conflict risk and any renewed signs of strain in US-Iran negotiations.

Looking ahead

• Watch for signs of whether UK political pressure develops into a formal leadership contest.
• GBP/USD needs to reclaim key moving averages to repair near-term momentum.
• US data remain central to the dollar’s rates-driven support.
• Energy prices are likely to remain a key swing factor for EUR/USD and broader risk sentiment.
• A further break lower in EUR/USD could invite fresh momentum selling.