USD: Deal in sight?
The US dollar softened yesterday, testing the 99 support line, on reports that the US and Iran may have reached a tentative deal. This would see the ceasefire extended by 60 days while both sides commit to further talks on more complex issues, including Iran’s nuclear program.
Nothing has been officially confirmed yet, and it remains unclear how the reopening of the Strait of Hormuz would fit into any interim agreement. We have been here before, where progress towards a truce appears close, only for the stalemate to persist. Markets are likely to hold off committing to further dollar selling until more clarity emerges.
Earlier in the session, the Personal Consumption Expenditures (PCE) deflator for April was released, but triggered little market reaction. The release was in line with expectations on a year-on-year basis and slightly softer on a month-on-month basis. The y/y headline figure rose to 3.8% from 3.5%, while the m/m print came in at 0.4% (down from 0.7%, versus an estimate of 0.5%). The core component – which strips out volatile energy and food prices – rose to 3.3% y/y from 3.2%. The slightly softer outcome is unlikely to trigger any meaningful dovish repricing. Markets continue to expect a steady Fed stance for the remainder of the year, with a modest probability of a hike by year-end – around 15 basis points currently priced in.
For the remainder of the week, a more meaningful breach of the 99 level appears warranted should we receive official validation of the deal and, importantly, greater clarity on its implications for Hormuz.
EUR: Euro sentiment turns subdued
Options markets point to euro sentiment becoming more uniformly subdued across different time horizons. Risk reversals across tenors – which reflect relative hedging demand for EUR versus USD strength – show a preference for the latter. The more compressed range, as the chart below indicates, suggests an increasingly unanimous view and may point to less exciting price action ahead, under the base case that the impasse over Hormuz drags on.
There is also a rates story that lacks much excitement from the euro side. Markets are pricing in almost a full 25bp hike for June, but the extent to which forward guidance remains hawkish is likely to be quite limited, given the highly uncertain outlook, the softer macro backdrop compared with 2022, and the largely insurance-based nature of the expected hike. In other words, this could be the ECB’s only hike this year, delivered primarily to demonstrate its commitment to keeping inflation anchored.
Today, markets will parse May’s preliminary inflation readings for Germany and France, which will feed into next week’s aggregate print. Should a significant downside surprise fail to materially shift pricing for a hike in two weeks, it would reinforce the view that the move is more symbolic than substantively effective.
GBP: Flat on the week, down on the month
Tentative signs of a renewed US–Iran ceasefire have provided some support to sterling via the risk‑sentiment channel, with GBP/USD holding above 1.34 this week. However, conviction behind the move remains limited, leaving the pair broadly flat on the week, while GBP crosses continue to show more mixed performance, with the pound lagging higher‑beta peers.
We remain cautious on GBP/USD upside. A full unwind in US dollar strength is not a given, even in a de‑escalation scenario, given the continued support from relatively strong US growth and rates dynamics. Indeed, elements of “dollar exceptionalism” are re‑emerging, underpinned by higher energy prices, AI‑driven productivity gains, and ongoing global fiscal expansion.
Domestically, sterling has largely priced out recent political risk. This reflects both fading media attention and the lack of clarity around the timing of any leadership challenge. With Prime Minister Starmer signalling his intention to remain, a credible contest is unlikely until later in the year, making the risk harder for markets to express in the near term.
At the same time, the perceived frontrunner, Andy Burnham, has adopted a more market‑friendly tone, committing to existing fiscal rules and avoiding signals of looser borrowing. This shift has helped reduce the near‑term fiscal risk premium, even as broader political uncertainty remains unresolved.
Overall, this has allowed the pound to retrace most of the losses seen earlier in the month. However, sterling remains down over 1% against the dollar on a monthly basis, leaving it among the weaker G10 performers.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: May 25-29
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*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.
