USD: Conflict tensions and fresh US data muddies the outlook
Tensions in the Middle East stayed elevated after the US struck Iranian military targets for the second time this week, while Kuwait said it had responded to missile and drone threats. Even so, US officials stressed that the latest action was defensive after Iranian drones were fired at a commercial ship, and they said the ceasefire still holds. That leaves markets with a fragile calm. The Strait of Hormuz remains a key pressure point, especially after President Trump said the waterway must stay open.
At the same time, today’s latest US economic reports sent mixed signals. Personal income was flat in April, while personal spending still rose 0.5%, which suggests households may be leaning more on savings as income growth stalls. Inflation offered only limited relief. Monthly core prices eased slightly to 0.2%, but the annual core rate still edged up to 3.3%, showing that price pressures remain sticky.
Separate reports showed weaker growth and uneven business demand. First-quarter GDP was revised down to 1.6%, pointing to slower momentum at the start of the year. Durable goods orders surprised on the upside, but core capital goods orders fell by more than 1%, which signals greater caution from firms on future investment. Taken together, the backdrop is still uneasy: geopolitical risk is elevated, the US economy is flashing mixed signals, and the next Fed meeting may reveal a central bank that is far from united. Some policymakers are no longer seeing a rate cut as the obvious next step, leaving Fed Chair Kevin Warsh to make the case for holding steady rather than tightening further.
GBP: Fading resilience into month-end
Sterling has come under renewed pressure today, with GBP/USD drifting back from recent highs and GBP/EUR struggling to sustain gains near 1.16, as a more challenging mix of domestic and external drivers reasserts itself.
While the pound had been one of the better-performing G10 currencies versus the dollar since last week – supported by Andy Burnham’s commitment to fiscal discipline and softer USD dynamics linked to tentative Iran deal optimism – that support is starting to fade. The stalling of US–Iran negotiations is proving key: the longer the impasse persists, the greater the risk of renewed USD haven demand and a further hawkish repricing of Fed expectations, both weighing on GBP/USD. This is increasingly reflected in rates, with the UK–US 2-year yield spread narrowing, pointing to downside pressure.
Domestic risks are also resurfacing. The upcoming by-election threatens to trigger a prolonged leadership contest, keeping investors cautious. Options markets reinforce this shift, with 25-delta risk reversals negatively skewed across tenors, signalling growing demand for GBP downside protection.
Technically, momentum is fading. GBP/USD remains supported above 1.33, but upside looks capped toward 1.35–1.36, while GBP/EUR’s failure to clear 1.16 reinforces the range-bound but fragile tone.
Overall, GBP looks increasingly vulnerable, with near-term resilience giving way to a more fragile, risk-sensitive profile.
CAD: Stays on the defensive
As tensions revive in the Middle East, the Canadian dollar still looks fragile, with the short end of the rates market doing most of the work against it. The US–Canada 2-year government yield spread is now sitting around 120bp in favour of the US based on the latest official benchmarks, keeping the carry backdrop tilted toward USD demand and leaving USD/CAD supported near the top of its recent range. That widening has been reinforced by a familiar policy mix: hotter US inflation has kept markets leaning toward a “higher-for-longer” Fed, while Canada’s latest inflation mix was softer beneath the surface, with core inflation easing to 2.1% in April even as headline CPI rose on energy. In other words, Canada has not yet delivered the kind of domestic macro surprise needed to offset the US yield advantage, and as long as that relative-rate imbalance holds, the Loonie remains vulnerable.
The other problem for CAD is that one of its recent supports may be fading. Canada’s trade balance swung back to a C$1.8bn surplus in March, but that improvement was driven heavily by a rebound in gold shipments and energy exports, with goods exports up 8.5% m/m, metal and non-metallic mineral exports up 24.0%, and energy exports up 15.6%. That is constructive at the headline level, but the details matter: much of the strength came through nominal prices rather than stronger real export momentum, with official data showing export volumes actually edged lower in March. Since then, both oil and gold have come off their recent highs, which reduces the terms-of-trade support that helped the Loonie stabilize earlier in the month and makes March’s trade bounce harder to extrapolate forward.
There is also some domestic noise in the background that does not help sentiment. Alberta is now heading toward an October 19, 2026 non-binding referendum question on whether the province should begin the constitutional path toward a future binding separation vote, and while that is not yet a core macro driver, it does inject an additional layer of political risk premium into CAD at the margin. Broader positioning is not offering much of a cushion: sentiment still slightly bearish, with net CAD futures positioning around -28k contracts, and the latest CFTC data remain consistent with that picture, showing leveraged funds net short CAD while asset managers are only modestly net long. Taken together, a wide front-end rate gap, softer oil and gold, Alberta headline risk, the still-cautious futures positioning and the CUSMA deal review just around the corner, the balance of risks continues to argue for a Canadian dollar that stays defensively biased in the near term.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: May 25 – 29
All times are in EST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
