Central Banks Take Centre Stage as Inflation and Oil Risks Keep FX Markets on Edge

GBP – Pound under pressure ahead of Bank of England decision

The Pound has started the week under some pressure against most major currencies, although it is holding slightly firmer against the US Dollar.

The main focus for markets this week is the Bank of England interest rate decision on Thursday. Markets currently expect the Bank to leave rates unchanged at 3.75%, but the voting split and guidance will be closely watched.

Recent UK inflation data showed that core inflation eased slightly to 3.1%, down from 3.2%. This gives the Bank of England some breathing room, but inflation remains above target and higher oil prices have added fresh uncertainty to the outlook.

BoE Governor Andrew Bailey has suggested there is no rush to adjust policy, despite acknowledging that the economy has faced a significant negative shock. However, some policymakers remain concerned about inflation pressures, meaning the market will be watching closely for any signs of disagreement within the committee.

For GBP, the key points this week are:

• Whether the Bank of England keeps rates unchanged as expected
• How many members vote for a change in policy
• Whether the Bank sounds more cautious about inflation or economic growth
• How GBP reacts to the US Federal Reserve decision the day before

A more cautious or dovish Bank of England could weigh on the Pound, while any suggestion that rates may need to stay higher for longer could offer some support.

EUR – ECB meeting takes centre stage

The Eurozone focus this week is the European Central Bank meeting on Thursday.

The ECB is not expected to raise interest rates this week, but markets will be listening closely for its tone on inflation and future policy.

Higher oil prices are already feeding into the economic data, raising concerns around a stagflation-style shock — where inflation stays high while growth weakens. Germany is particularly exposed, with the latest Ifo business sentiment index falling to its lowest level since the pandemic.

For the Euro, the key points this week are:

• Whether the ECB keeps a firm stance on inflation
• Any signal that a future rate hike remains possible
• How policymakers respond to higher oil prices and weaker growth
• Whether inflation expectations remain under control

If the ECB sounds too relaxed about inflation, the Euro could come under pressure. However, a firmer message that rates may need to rise later in the year could help keep the Euro supported.

USD – Fed decision and inflation data in focus

The US Dollar has started the week slightly softer, helped by tentative signs of progress around the Strait of Hormuz and a more positive tone across risk markets.

However, downside for the Dollar may be limited while oil prices remain elevated and inflation risks stay in focus.

The main event this week is the Federal Reserve interest rate decision on Wednesday. Rates are expected to remain unchanged, but markets will be watching for guidance on how long policy may need to stay restrictive.

For the Dollar, the key points this week are:

• Whether the Fed pushes back against expectations for rate cuts
• How policymakers respond to higher energy prices
• Thursday’s core PCE inflation data, the Fed’s preferred inflation measure
• The first estimate of first-quarter US GDP
• Consumer confidence data and wider risk sentiment

With employment and consumer spending still holding up, the Fed is unlikely to signal that the inflation fight is over. If it suggests rates may need to stay higher for longer, this could offer the Dollar some support.

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