Market overview

Markets are no longer trading this as a simple geopolitical shock. The Iran conflict has sharpened the focus on energy prices, fiscal strain and sticky inflation, driving a broad repricing across bonds, equities and FX. UK inflation added an important domestic angle, with April CPI undershooting expectations at 2.8% year on year, easing near-term pressure on the Bank of England but not fully removing the risk of renewed price pressure if energy costs continue to feed through.

The bigger story remains the global bond sell-off. Long-end yields are pushing higher as investors demand more compensation for duration, while risk appetite is starting to look more fragile. For now, the dollar remains the cleanest expression of this backdrop, supported by higher US yields, resilient growth and a stronger relative energy position.

USD: Yield advantage keeps the dollar supported

The dollar continues to benefit from the current inflation and rates narrative. The US Treasury curve is bear steepening, but because the move is still being driven by inflation concerns rather than doubts over US credit quality, it remains broadly supportive for the greenback.

Markets are also reassessing the Fed outlook. Expectations have shifted away from multiple rate cuts in 2026 and towards the possibility of renewed tightening later this year. With US growth still outperforming and energy risks keeping inflation concerns alive, the dollar’s rate advantage remains a powerful support.

GBP: Softer CPI tempers BoE pressure

UK inflation surprised to the downside in April, with headline CPI slowing to 2.8% from 3.3% and core CPI easing to 2.5%. The softer print reduces the immediate need for a more hawkish Bank of England response, although the relief may prove limited.

Much of the decline reflected favourable base effects, meaning investors may be reluctant to extrapolate too much from one softer release. Sterling initially weakened, with GBP/USD falling towards 1.3378 before recovering near 1.3390, while GBP/EUR briefly slipped to 1.1537 before stabilising.

The pound remains highly sensitive to global bond market volatility. With UK yields rising from a weaker growth starting point than the US, the move looks more like a term premium shock than a genuine upgrade to the domestic outlook. That leaves GBP/USD vulnerable, although GBP/EUR has found some stability, with support around 1.145 still intact.

EUR: Technical damage leaves the euro exposed

EUR/USD has broken below 1.16 for the first time since early April, extending a run of losses that has left the pair trading below both its 100-day and 200-day moving averages. That marks a clear deterioration in momentum and keeps the near-term bias tilted lower.

Bond volatility is adding to the euro’s problems. With global yields testing fresh 2026 highs and rates uncertainty rising, EUR/USD is struggling to attract conviction. Unless fixed income markets settle, the euro is likely to remain under pressure, particularly while the dollar continues to enjoy stronger relative growth and a wider rate cushion.

Looking ahead

• Global bond volatility remains the key cross-asset signal for FX markets.
• Further strength in energy prices would reinforce the inflation narrative and support the dollar.
• UK inflation has softened, but markets may wait for further evidence before pricing a more dovish BoE path.
• GBP/USD support near 1.33 and GBP/EUR support near 1.145 remain important near-term levels.
• EUR/USD needs to reclaim its key moving averages to ease downside pressure.
• Equity weakness could add another layer of demand for the dollar if risk sentiment deteriorates.