Market overview

Central banks are firmly back in focus as the latest energy shock complicates the inflation outlook and narrows the room for policy easing. The Fed’s hold was expected, but the tone was not. By placing greater emphasis on geopolitical uncertainty and linking elevated inflation partly to higher global energy prices, policymakers made clear that crude is no longer just a market concern. It is now a central part of the policy debate.

That leaves FX markets trading less on rate expectations alone and more on how each central bank manages the balance between inflation risk, growth resilience and credibility. The dollar has benefited from the Fed’s more cautious stance, while sterling now faces a key Bank of England test and the euro waits on whether softer core inflation can keep the ECB comfortable. With Brent near $120 and WTI around $106, energy remains the main macro transmission channel across rates, risk sentiment and currency markets.

USD: Fed hold carries a firmer message

The Fed left the funds rate unchanged at 3.50% to 3.75%, in line with expectations, but the statement was far from routine. Policymakers kept the growth assessment broadly constructive, describing activity as solid, unemployment as little changed and job gains as low on average. The more important shift was around inflation and risk. The Committee upgraded inflation language to elevated and explicitly pointed to higher global energy prices as part of the problem.

The decision also revealed a more divided Fed. The 8 to 4 vote split marked the highest number of dissents at a single meeting since 1992, and the disagreement was not all in one direction. One member favoured an immediate cut, while three others supported holding rates but objected to language that preserved an easing bias. Their concern was that the Fed should not be signalling future cuts while energy prices and uncertainty are rising.

Powell’s press conference reinforced a patient, data-dependent stance. He argued that tariff-related inflation should fade as a one-off effect, but acknowledged that the oil shock has not yet fully appeared in the data and could feed into core prices if disruption persists. That combination leaves policy near the restrictive end of neutral, with no appetite to hike for now, but a higher hurdle for cuts than markets had assumed earlier this year.

The leadership transition added another layer. Powell described his decision to remain on the Board as institutional rather than political, stressed the importance of Fed independence, and pushed back against the idea that he would act as a “shadow chair” once the handover takes place. The hawkish dissents suggest the next chair may inherit a more fractured Committee, especially if energy prices stay high and markets continue to look for reassuring headlines that do little to restore physical flows.

GBP: BoE guidance takes centre stage

Sterling is on the defensive against the dollar as renewed frustration around US-Iran talks keeps attention on access to the Strait of Hormuz. With oil prices up more than 15% this week, the energy shock has become the dominant macro channel, supporting the dollar and pulling GBP/USD back from recent highs.

The immediate focus is now today’s Bank of England decision. No change in Bank Rate is expected, which means the vote split, forward guidance and updated forecasts will drive the reaction. UK yields have already moved sharply higher this week, and with Brent continuing to climb, markets are highly sensitive to any suggestion that policymakers are not in a hurry to address renewed inflation risk.

A decisively hawkish message could trigger a knee-jerk gilt sell-off and support the pound through the yield channel. The greater risk for sterling would be a patient tone that reminds investors of the 2022 “transitory” inflation misstep. In that scenario, bonds could come under heavier pressure and the pound may struggle, particularly if markets question the BoE’s inflation credibility. OIS pricing has already adjusted, with investors now implying more than three BoE hikes this year.

Technically, GBP/USD has slipped below its 100-day moving average and is testing the rising 21-day average. The 50-day and 200-day averages sit just above 1.34, creating an important medium-term support zone. Daily RSI remains neutral but is bending lower, consistent with consolidation rather than a clear trend reversal. April’s price action still resembles a bull-flag-style pause after the sharp early-month recovery, but confirmation now depends heavily on how the BoE handles today’s policy message against a backdrop of surging oil prices.

EUR: ECB caution still looks the base case

Germany’s April inflation print rose, but by less than feared. National CPI increased to 2.9% year on year from 2.7% in March, while the harmonised European measure also printed at 2.9%, below expectations of 3.1%. Core inflation eased to 2.3% from 2.5%, suggesting that, for now, the inflation shock remains largely concentrated in energy rather than spilling aggressively into underlying prices.

That should keep the ECB cautious while preserving full optionality. The bar for a hawkish shift looks high, particularly with the wider data backdrop not yet strong enough to justify a firmer stance. As a result, the FX pass-through from the ECB is likely to remain limited unless today’s euro-area releases materially alter the growth or inflation picture.

EUR/USD is still trying to hold above its 200-day moving average near 1.1680. The pair had moved back above that level on earlier hopes of de-escalation, but that momentum has faded. Yesterday’s hawkish Fed tone and President Trump’s rejection of Iran’s interim proposal aimed at reopening the Strait placed renewed pressure on the single currency.

Looking ahead

• BoE decision: no rate change is expected, so the vote split, guidance and forecasts will be key.
• ECB signals: policymakers are likely to stay cautious unless euro-area data forces a rethink.
• Euro area data: Q1 GDP, German and euro-area unemployment, and April bloc CPI are in focus.
• Energy prices: Brent and WTI remain the main transmission channel across inflation, rates and FX.
• EUR/USD: 1.1680 is the key level to watch around the 200-day moving average.
• GBP/USD: the area just above 1.34 remains the main medium-term support zone.