Forex Market Report – US Dollar Strength and UK Political Uncertainty Drive Markets

Global markets turned more cautious last week as rising inflation concerns, ongoing Middle East tensions and renewed political uncertainty in the UK pushed investors back toward the US Dollar. Sterling suffered its weakest week in months, while elevated oil prices and shifting central-bank expectations kept volatility high across currency markets. Attention now turns to the G7 meeting on Tuesday alongside key UK inflation, labour and PMI data.

Last Week

GBP – Political Uncertainty Weighs on Sterling

The Pound Sterling came under heavy pressure last week, posting its weakest performance in several months against the US Dollar.

Political uncertainty weighed heavily on sentiment after Labour suffered losses in local elections, fuelling speculation around Prime Minister Keir Starmer’s leadership while Reform UK continued to gain momentum. Markets also reacted to reports of growing tensions within government and speculation around potential future leadership challengers.

At the same time, rising oil prices linked to the ongoing Middle East conflict intensified inflation concerns globally and added pressure to risk-sensitive currencies such as Sterling.

Despite stronger-than-expected UK GDP data and hawkish comments from Bank of England Chief Economist Huw Pill, the Pound struggled to recover as investors focused instead on rising UK gilt yields and broader fiscal concerns.

EUR – Euro Struggles Amid Energy Concerns

The Euro remained under pressure last week as geopolitical uncertainty and weaker European sentiment data limited demand for the single currency.

Markets remained focused on developments surrounding Iran, Lebanon and the Strait of Hormuz, with fears over disrupted oil supplies continuing to drive inflation concerns higher across Europe.

Economic data painted a mixed picture. Eurozone PMI readings showed manufacturing improving modestly, although weakness in the services sector dragged broader business activity lower. German business confidence data also disappointed, highlighting continued concerns around growth and energy costs.

USD – Inflation Boosts Dollar Demand

The US Dollar regained strength last week after hotter-than-expected inflation data forced markets to reassess expectations for future Federal Reserve rate cuts.

Higher energy prices pushed inflation higher, while resilient US economic data, including retail spending and PMI readings, reinforced expectations that the Federal Reserve may need to keep interest rates elevated for longer.

Improving US-China relations also helped support broader confidence in the US economy, adding further strength to the Dollar throughout the week.

What’s Coming Up This Week

GBP – Inflation and Labour Data in Focus

This week will be key for the Pound, with UK employment figures, inflation data and retail sales all due for release.

Markets will be watching closely for signs of whether inflation pressures continue building and how much pressure remains on the Bank of England heading into future policy meetings. Preliminary PMI data later in the week will also provide an important update on overall business activity.

Political developments surrounding Labour leadership speculation are also likely to remain on investors’ radar.

EUR – PMIs and Energy Prices Remain Key

For the Euro, attention will remain on business activity data and inflation expectations as markets continue assessing the economic impact of higher energy prices.

PMI figures will provide further clues on whether weakness across the Eurozone economy is deepening, while traders will remain highly sensitive to any developments involving Iran and disruptions to global energy supply.

USD – Fed Expectations and G7 Meeting

In the US, traders will continue monitoring Federal Reserve expectations following last week’s stronger inflation data.

Flash PMI readings later in the week will offer fresh insight into the strength of the US economy, while the G7 meeting on Tuesday could generate additional volatility if leaders comment on inflation, trade or geopolitical tensions.

Final Comment

Markets continue to balance inflation concerns against geopolitical uncertainty, with the Middle East remaining a major driver of sentiment. Any signs of progress in US-Iran negotiations or easing tensions around the Strait of Hormuz could quickly shift oil prices

‍