GBP: Politics drives the risk premium, but spot holds up

Sterling staged a late recovery after early pressure linked to leadership noise around Prime Minister Keir Starmer. Comments from Scottish Labour leader Anas Sarwar calling for Starmer to step aside initially unsettled markets, before a coordinated show of support from senior cabinet figures helped calm nerves and trim losses.

GBP/EUR remains the cleanest barometer of UK-specific risk, with spot selling now reinforced by a notable shift in options pricing. Risk reversals have moved to their most GBP-bearish levels across tenors since the pre-budget episode, suggesting investors are paying up for downside protection even though spot has not fully broken down. The 50-day moving average held despite an intraday dip, and month-to-date performance is still only modestly weaker.

For GBP/USD, domestic headlines mattered less. The pair benefited from broad USD softness, masking UK politics in the day-to-day price action. Longer term, the risk is that the political premium stays embedded into key domestic milestones, including the upcoming by-election and the May local elections. On the macro side, the Bank of England’s easing bias likely becomes more actionable only if inflation, still elevated, continues to roll over convincingly.

USD: Treasuries in the spotlight as data risk builds

The dollar index fell more than 0.8% on Monday, unwinding last week’s gains as G10 FX firmed and attention returned to demand for USD assets. Reports that Chinese regulators have encouraged financial institutions to reduce concentrated exposure to US Treasuries added fuel to an existing diversification narrative.

JPY strength has been a material driver of the move. The yen found support following Prime Minister Takaichi’s decisive election result, which revived expectations of official discomfort with excessive FX moves. With USD/JPY lower on the week and JPY a meaningful weight in the dollar index, the mechanical drag has been hard to ignore.

The US calendar now does the heavy lifting. Softer labour signals last week have left the USD more sensitive to downside surprises, particularly with payrolls and benchmark revisions in focus. The market response function looks asymmetric: a weak print would likely extend the grind lower, while a solid number may only stabilise the USD rather than reverse the broader narrative. For the Fed, the question is less where rates are today and more how quickly the path shifts if growth and jobs momentum cool further while inflation remains sticky.

EUR: Metals and risk sentiment keep the bid intact, positioning is the constraint

EUR/USD extended higher, pushing through 1.19 and logging one of its strongest daily gains since September. The macro mix is supportive: risk tone has improved, the US curve has steepened, and precious metals strength is feeding through to FX.

Metals-FX linkages have become unusually influential. Recent price action suggests EUR/USD is trading with a stronger-than-normal sensitivity to silver, and the impulse has been positive as metals have rallied. This fits with the broader theme of incremental diversification away from the USD, where flows into alternative stores of value can indirectly support the euro as a liquid non-USD counterpart.

The main near-term brake remains positioning. Leveraged fund longs have moved back towards stretched levels, which can limit follow-through and increase vulnerability to sharp pullbacks on any risk wobble or US data upside surprise.

Looking ahead

• US data: retail sales, CPI, and payrolls plus benchmark revisions, with the USD most exposed to a downside labour surprise.

• Japan: watch official rhetoric and price action in USD/JPY for signs of heightened intervention sensitivity.

• UK politics: leadership headlines remain a live input for GBP/EUR, with options markets already pricing a fatter left tail.

• EUR/USD: positioning versus metals sensitivity is the key tension, with volatility in precious metals likely to keep spillovers elevated.