USD: From tactical noise to structural strength
The US dollar narrative through May has transitioned from headline‑driven volatility to a more structurally anchored bullish bias, and the latest developments reinforce that shift.
Early in the month, the dollar traded largely as a function of geopolitics, rising on escalation via oil and haven demand, and falling on de‑escalation hopes. That binary framing has since broken down. Markets are now reassessing the assumption that a peace deal is inherently USD‑negative. Instead, outcomes increasingly skew toward dollar resilience in either scenario: escalation supports the USD through safe‑haven flows and higher energy prices, while de‑escalation reinforces US growth outperformance and rate differentials.
That evolution is now being validated by the data. The Citi US Economic Surprise Index is pushing toward new one-year highs, underlining persistent economic momentum, while inflation remains elevated, amplified by ongoing energy uncertainty. US real yields have risen around 40bp since the conflict began, and rate volatility has picked up, signalling tighter financial conditions and a more entrenched “higher‑for‑longer” regime.
At the same time, markets remain caught in a fragile equilibrium. Investors are increasingly tolerant of geopolitical noise, including recent US strikes on Iranian boats trying to place mines, as long as a path to a deal remains plausible. However, that tolerance looks conditional. Bond market volatility is rising, and any further move in yields risks spilling into equities, where resilience has so far held.
Crucially, this backdrop raises the bar for sustained USD weakness. Whether through inflation persistence, relative growth strength, or renewed risk aversion, the prevailing macro mix continues to favour the dollar. The narrative has shifted decisively: from a reactive, oil‑driven currency to one underpinned by structural macro advantages, with peace no longer a clear bearish catalyst.
EUR: Hormuz uncertainty caps EUR/USD
EUR/USD remains hostage to conflicting developments in the Middle East – a build-up of de-escalation momentum over the weekend and on Monday, as US officials hailed progress on a peace deal, was followed by renewed US-Israeli strikes overnight. EUR/USD has pared yesterday’s gains driven by peace optimism, capped below the 1.1650 mark, as it awaits clarity on what the renewed strikes mean for ongoing talks over an interim deal.
Meanwhile, the euro has lost a fair bit of support from rates. At the end of April, markets had priced in the most aggressive tightening bias for the ECB, with around 85bp expected by year-end. That has now declined to roughly 55bp. Whether June delivers a “risk management” hike to pre-empt stronger price pressures remains to be seen. However, it is becoming clearer that the euro may struggle to benefit significantly, as weakening macro conditions argue otherwise. At the same time, if the geopolitical stalemate persists into June, it is likely to continue overshadowing rate dynamics, keeping their influence on FX secondary.
Looking ahead to the week, focus will be on Germany’s labour market report and May CPI, as the ECB approaches its June meeting with conflicting signals. Beyond that, the eurozone calendar is relatively quiet. In the US, attention will turn to Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, which feeds directly into GDP calculations.
We continue to see downside risks for EUR/USD in a scenario where no meaningful progress emerges from Hormuz.
GBP: Flirting with 2026 highs versus the euro
Sterling has remained relatively firm following last week’s outperformance across G10, with GBP/USD holding above 1.34 and GBP/EUR stabilising in the upper‑1.15s, though still struggling to break the 1.16 resistance level that has capped rallies throughout 2026. Importantly, the move looks less like a fresh bullish phase and more a retracement from the prior week’s politically driven sell‑off.
The primary support has come from a partial unwinding of domestic political risk. Reassurances on fiscal discipline from Andy Burnham and renewed rhetoric around closer UK‑EU ties have helped steady sentiment, while gilt market volatility has eased, aided by global risk conditions and tentative optimism around US–Iran developments.
However, the macro backdrop has begun to soften. Earlier in the year, relatively resilient UK data compared to G10 peers had helped anchor sterling and pointed to further upside. That dynamic may start fading. A run of softer releases – from labour market cooling to contracting PMIs – signals a loss of momentum and reinforces expectations of a BoE hold next month.
Bottom line – sterling looks stable but not strong – supported in the near term by political repricing and external factors, but facing growing headwinds from a weakening macro backdrop and lingering political risk.
There are also signs of a potential divergence across sterling crosses. GBP/EUR remains better supported, holding above key moving averages, though a sustained break above the 1.16 ceiling – which has capped rallies throughout 2026 – is needed to unlock further upside. By contrast, GBP/USD looks less convincing, with upside momentum fading amid renewed USD strength.
Market snapshot
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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.
