Last Week

GBP – Sterling supported but cautious

The Pound held relatively firm over the week, supported by stronger-than-expected UK Retail Sales, which pointed to resilient consumer demand despite broader global uncertainty. This helped Sterling outperform the euro, particularly toward the back end of the week.

However, gains were somewhat capped as markets remained cautious ahead of this week’s Bank of England decision. Broader risk sentiment also played a role, with Sterling benefiting at times from improving optimism around potential US-Iran talks, which reduced safe-haven demand for the US Dollar.

Overall, while the UK data backdrop provided support, Sterling remained sensitive to external developments, particularly energy prices and geopolitical risk.

EUR – Pressure builds on weak data and sentiment

The euro struggled to gain traction, with the currency coming under pressure from both weak regional data and rising geopolitical concerns. Germany’s latest IFO survey highlighted deteriorating business sentiment, reinforcing the narrative of a fragile economic outlook across the Eurozone.

At the same time, the broader backdrop remained challenging. The escalation in Middle East tensions, combined with rising energy prices, weighed more heavily on the euro given Europe’s sensitivity to energy supply disruptions. Even as the US Dollar showed some weakness at times, the euro failed to capitalise meaningfully, leaving it on the back foot for much of the week.

USD – Safe-haven demand vs softer sentiment

The US Dollar saw mixed performance, ultimately strengthening over the week as geopolitical tensions supported its safe-haven appeal. Uncertainty surrounding the Strait of Hormuz and ongoing disruptions to global oil supply kept markets cautious, underpinning demand for the greenback.

However, this strength was not one-directional. Periods of optimism around potential US–Iran negotiations briefly weighed on the dollar, while softer US consumer sentiment data highlighted growing concern among households, particularly around rising energy costs and inflation expectations.

Economic data was otherwise relatively limited, though PMI figures showed the US economy maintaining a more stable footing compared to Europe, reinforcing the divergence between the two regions.

The Week Ahead

GBP – BoE decision in focus

Attention now turns squarely to the Bank of England, with markets expecting policymakers to keep rates unchanged. The focus will instead be on forward guidance, particularly how the BoE views rising energy prices and their potential impact on inflation.

Any shift in tone could have a meaningful impact on Sterling, especially given recent signs of resilience in UK consumer activity. Markets will also keep an eye on broader risk sentiment, which continues to influence GBP direction.

EUR – ECB outlook and inflation risks

For the euro, the European Central Bank meeting will be the key event. Like the BoE, the ECB is expected to hold policy steady, but the messaging will be closely scrutinised.

With energy prices rising and growth already weak, policymakers face a delicate balance. Markets will be looking for any indication of how the ECB plans to respond if inflation pressures persist, particularly given the region’s vulnerability to external shocks.

Additional focus will fall on upcoming Eurozone inflation and growth data, which could further shape expectations.

USD – Fed decision and key data releases

The Federal Reserve takes centre stage this week, with markets widely expecting no change in policy. However, the tone from Chair Jerome Powell will be crucial, particularly given heightened inflation risks linked to energy prices and ongoing geopolitical tensions.

Alongside the Fed, a busy US data calendar includes GDP, the Fed’s preferred inflation measure (PCE), and manufacturing activity indicators. These releases will help determine whether the US economy continues to outperform and how policymakers may respond in the months ahead.

Markets will also remain highly sensitive to developments in the Middle East, as any escalation or de-escalation could quickly shift demand for the US Dollar.

Final Comment – Oil and geopolitics driving markets

At present, geopolitical developments remain the dominant driver for markets. Ongoing tensions in the Middle East, particularly around the Strait of Hormuz, continue to disrupt oil supply and push energy prices higher. This is feeding into inflation concerns globally and complicating the outlook for central banks.

Until there is greater clarity on whether negotiations will progress or tensions escalate further, markets are likely to remain cautious, with currencies reacting more to headlines than traditional economic fundamentals.

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