Markets Start the Week Cautiously as UK Politics, Middle East Tensions and Inflation Risks Drive FX Moves

GBP – Political uncertainty keeps Sterling under pressure

The Pound started the week slightly weaker, particularly against the Euro, as markets reacted to fresh political uncertainty in the UK.

Labour’s poor local election results have increased pressure on Prime Minister Keir Starmer, with growing speculation around his leadership and the future direction of government policy. Markets dislike uncertainty, especially if it raises questions around spending discipline, borrowing, or a possible shift in economic policy.

That said, Sterling’s losses have been fairly limited so far. There does not appear to be any major panic in the market, but there is enough nervousness to make traders cautious.

For GBP/EUR, this political uncertainty may limit any short-term upside. If the situation calms down and Starmer remains firmly in place, focus may shift back to the UK’s relatively attractive bond yields, which could offer some support to the Pound.

Looking ahead, the key UK data release this week will be the preliminary first-quarter GDP figures. A stronger growth reading could help Sterling recover, while weaker data may add further pressure.

What this means:
Sterling is being held back by political uncertainty, but the downside may be limited unless the situation worsens. UK growth data could be the next major driver.

EUR – Euro supported by weaker Dollar, but data remains mixed

The Euro ended last week on a stronger footing, helped mainly by weakness in the US Dollar.

However, the Euro’s own economic backdrop remains mixed. German industrial production unexpectedly fell in March, which is another reminder that parts of the Eurozone economy are still struggling.

For now, the Euro is being supported by expectations that the European Central Bank may still raise interest rates this summer, especially with oil prices remaining elevated and inflation risks still present. Markets are currently giving a high chance of a 25 basis point rate hike in June.

That said, the Euro may struggle to push significantly higher unless the economic data improves or there is a clearer improvement in global risk sentiment.

What this means:
The Euro is holding up well, but this is partly because the Dollar has been weaker. Without stronger Eurozone data, further gains may be harder to sustain.

USD – Dollar finds support from Middle East tensions and inflation worries

The US Dollar started the week firmer as optimism over a possible US-Iran peace deal faded.
Renewed tensions in the Strait of Hormuz have brought oil prices and global inflation risks back into focus. When geopolitical uncertainty rises, the Dollar often benefits as investors move towards safer assets.

US economic data is also keeping markets cautious. Although consumer confidence has weakened, the labour market remains resilient, which gives the Federal Reserve less room to sound relaxed on inflation. Markets are now paying close attention to whether higher energy prices could feed through into broader inflation.

This week’s US inflation data will be important. If inflation comes in higher than expected, it could increase expectations that the Federal Reserve may need to keep rates higher for longer, or even consider further rate rises later in the year.

What this means:
The Dollar is being supported by safe-haven demand, higher oil prices, and the possibility of a more cautious Federal Reserve. US inflation data could be the key driver this week.

Currency Outlook

GBP/EUR
The Pound may remain under pressure in the short term while UK political uncertainty continues. If the situation settles and UK GDP data improves, Sterling could regain some ground.

GBP/USD
The pair remains caught between UK political risks and renewed Dollar strength. A stronger US inflation print could put further pressure on GBP/USD.

EUR/USD
The Euro is benefiting from a softer Dollar environment, but weak Eurozone data may limit further gains. A stronger Dollar could pull EUR/USD lower if US inflation surprises to the upside.

Key theme this week
The main focus for markets is whether political uncertainty in the UK, Middle East tensions, and upcoming US inflation data will push investors back towards safer currencies such as the US Dollar. For businesses with upcoming payments, this could mean more short-term volatility across GBP, EUR, and USD pairs.