USD: Geopolitics keeps markets whipsawing
Yesterday, stocks finished slightly higher after a choppy session, oil edged lower, and US Treasury yields extended their decline. The driver was the same familiar mix of optimism, doubt, and rapid-fire headlines around US–Iran talks.
Early enthusiasm cooled after it was reported that no deal has been reached, even if the gaps have narrowed, citing a senior Iranian source. Two issues continue to hang over the conversation: Iran’s uranium enrichment and control over the Strait of Hormuz, which keeps the “risk premium” in energy alive. It also means every incremental update can still move rates and the dollar in a hurry, especially with positioning already leaning into a narrow range.
Against the noise, the Fed message has been the steadier anchor. The April 28–29 FOMC minutes showed officials increasingly worried that inflation could take longer than expected to return to 2%. A majority also pointed to the possibility that additional policy firming could become appropriate if inflation stays persistently high. Just as important, “many” participants would have preferred removing language that markets read as an easing bias. In plain terms, the Fed is trying to stop investors from sprinting toward rate cuts before the data earns them. That is showing up in pricing, where expectations are skewed toward a prolonged hold, and the hurdle for the next cut looks higher than it did a few months ago.
Oil is the part of the equation that keeps making the Fed’s job harder. Pump prices remain sticky, and that keeps the household inflation narrative loud even when core measures cool. Demand also has not cracked cleanly. Recent US retail spending suggests bigger tax refunds helped cushion consumers as gasoline prices rose, which can delay the point where fuel costs force a more visible pullback. If that buffer fades while energy stays elevated, the squeeze can show up quickly in both sentiment and spending.
Earnings are reinforcing that same macro loop. Walmart’s results suggested the consumer is still functioning, with comparable sales at Walmart-only US stores up 4.1% excluding fuel. At the same time, the company highlighted how higher fuel costs can bite, particularly through delivery and fulfillment. When a scale player works to protect low prices, the margin pressure is a real-time reminder that the inflation impulse is not purely theoretical. Investors heard that tension in the guidance, and the stock reaction reflected how quickly “good” demand news gets filtered through the inflation lens.
The growth backdrop is also starting to look more split. The latest PMI shows the US holding around the low-50s while much of Europe sits below 50 and has weakened over the past three months. France stands out on the downside, while the Eurozone, Germany, and the UK remain soft. This kind of US–Europe divergence tends to support relative US resilience, but it can also keep global inflation signals messy. Softer Europe can dampen goods demand, yet tighter energy and steadier US activity can keep headline inflation risks alive.
Put it all together and the market’s rhythm stays intact. Oil headlines lift inflation risk, the Fed’s “higher for longer” posture stays sticky, and even solid earnings have to clear the same question: how long can the economy absorb expensive energy without inflation re-accelerating or margins giving way. Into a long weekend, that push-and-pull is still the cleanest way to frame what is moving rates, the dollar, and risk.
EUR: From stability to building downside pressure
EUR/USD has traded broadly flat on the week, holding around the 1.16 area, but this masks a meaningful shift in underlying dynamics. Beneath the surface, a combination of bond market turbulence, widening US–euro area data divergence, and a reversal in rate differentials has tilted the balance more clearly to the downside.
Earlier in the conflict, narrowing German–US yield spreads provided a degree of support for the euro, as markets priced a more hawkish ECB relative to a Fed seen as insulated from the inflation shock. That dynamic has now faded. In the wake of stronger US inflation prints and resilient activity data, rate differentials have moved back in the dollar’s favour, returning to pre‑conflict levels.
At the same time, Eurozone data has continued to weaken, reinforcing the divergence. This week’s PMI releases pointed to a fragile growth backdrop, with survey data consistent with a potential contraction in Q2, while US indicators remain firmly in expansionary territory. The result is a growing mismatch: a eurozone economy losing momentum versus a US economy still showing resilience.
Positioning adds to the risk. With asset managers and leveraged funds still long euros, the market appears vulnerable to a deeper unwind. In the absence of tangible progress on US‑Iran negotiations, the combination of resilient US growth, a less credible ECB tightening path, and elevated geopolitical uncertainty points to further downside.
Bottom line: The euro has shifted from being supported but capped to increasingly exposed, and without a clear de‑escalation catalyst or reversal in rate dynamics, EUR/USD risks extending lower toward the 1.15 area in the near term.
GBP: Harder to knock sterling lower
Yesterday saw the release of the UK’s preliminary S&P PMIs for May. Services, along with the composite index, slipped into contraction territory at 47.9 and 48.5 respectively, down from 52.7 and 52.6 in April. The manufacturing component remained unchanged at 53.7.
The decline points to softening sentiment among business participants in the face of geopolitical tensions and domestic political uncertainty. The resilience in manufacturing – despite expectations of a decline – may instead reflect front-loading of inventories to mitigate rising cost pressures stemming from the conflict.
Sterling nevertheless traded relatively calmly yesterday. The broader stagflationary signals from the PMIs have been both global in nature and ongoing, therefore largely priced in. Meanwhile, a quieter political backdrop has allowed pairs such as GBP/EUR to retrace much of the weakness seen in the aftermath of the local election results, when pressures on Starmer to resign quickly intensified. Starmer’s position remains precarious, though the bar for further meaningful downside in sterling from political risk now appears relatively high, requiring more sustained momentum to push him aside.
Meanwhile, both Governor Andrew Bailey and MPC member Alan Taylor spoke yesterday. From a monetary policy perspective, Taylor’s remarks were of greater relevance. He emphasised that the current level of restrictiveness – with rates still at 3.75% – may be sufficient to contain building price pressures, particularly given sluggish growth and a softening labour market, both of which should help cap corporate pricing power. However, Taylor remains one of the more dovish voices on the MPC, and the pound’s muted reaction to his comments suggests markets have his well-telegraphed inclination towards easing largely priced in.
Meanwhile, this morning’s consumer confidence and retail sales data reinforce a gloomy mood and waning consumer spending, amplified by the US-Iran war raising inflation risks. This caps a week of data releases that back the case for the BoE to hold interest rates steady in June.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: May 18-22
All times are in BST
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.
