Sterling Tests Key Levels as Global Tensions and Inflation Fears Drive Currency Markets

Markets returned from the UK bank holiday with currency moves still being heavily influenced by three key themes: Middle East tensions, oil prices, and shifting interest rate expectations.

The Pound has been trying to push higher against the Euro, but it is once again running into an important resistance area near 1.16. Against the US Dollar, Sterling has also pulled back slightly after briefly moving back towards the 1.35 level.

For clients with upcoming currency requirements, this is a good reminder that attractive levels can move quickly, especially when exchange rates are being driven by geopolitical headlines and central bank expectations.

GBP – Pound under pressure from weaker UK data

Sterling has had a mixed start to the week.

Against the Euro, the Pound has edged close to the important 1.16 level. This area has acted as a ceiling several times over recent months, with the market struggling to break above it in any meaningful way. For clients buying Euros, this remains a key level to watch.

If GBP/EUR fails to break through again, we could see the pair slip back into its recent range. This is why clients with upcoming Euro payments may want to consider securing at least a portion of their exposure while rates are still near the top end of the recent range.

The Pound has been helped by the UK still offering a higher interest rate than the Eurozone, with the Bank of England’s current Bank Rate at 3.75%. However, the Bank of England is facing a difficult balance: inflation is still above the 2% target, but recent UK data is showing signs of weakness.

Recent UK figures showed unemployment at 5.0% for January to March 2026, while retail sales volumes fell by 1.3% in April. This points to a softer consumer backdrop and a cooler jobs market, both of which could limit how aggressive the Bank of England can be.

The latest UK PMI survey also showed the private sector moving back into contraction, with the composite reading falling to 48.5 in May. Anything below 50 suggests business activity is shrinking, and the services sector saw its weakest reading since January 2021.

What this means for clients:

The Pound still has support from higher UK interest rates, but weaker economic data is making the outlook less clear. For Euro buyers, GBP/EUR near 1.16 remains an attractive area to review budgets, forward cover, or limit orders.

EUR – Euro weighed down by weak growth signals

The Euro is also facing pressure, mainly because the Eurozone economy continues to show signs of slowing.

The latest Eurozone PMI reading fell deeper into contraction territory in May, with the index dropping to 47.5 from 48.8 in April. The data suggests the Eurozone economy may contract by around 0.2% in the second quarter.

This creates a difficult situation for the European Central Bank. On one hand, higher energy prices are creating fresh inflation risks. On the other hand, weaker growth makes it harder for the ECB to justify being too aggressive with interest rates.

The ECB is expected to revise its inflation and growth forecasts in June, with officials highlighting that the economic outlook has deteriorated due to the Middle East conflict and higher energy prices.

For EUR/USD, the Euro remains vulnerable if US data stays firm and markets continue to price in a more hawkish Federal Reserve. A move lower towards the 1.15 area is possible if European data continues to disappoint and the Dollar stays supported.

What this means for clients:

Euro weakness is being driven by poor growth data, but the currency may still find support if inflation concerns force the ECB to keep policy tighter. For businesses selling Euros, current uncertainty makes it worth reviewing forward cover rather than relying on spot markets.

USD – Dollar supported by safe-haven demand and Fed expectations

The US Dollar has regained some strength after a softer start to the week.

Normally, improving market sentiment would weaken the Dollar, but the situation is more complicated at the moment. Middle East tensions are still creating safe-haven demand, while higher oil prices are keeping inflation concerns alive.

There were fresh reports of US-Iran tensions, with markets also focusing on whether any peace deal can hold and whether the Strait of Hormuz can fully reopen. Oil prices fell earlier on hopes of progress, but the situation remains sensitive.

The key US event this week is the PCE inflation report, which is closely watched by the Federal Reserve. If inflation comes in higher than expected, markets may increase expectations that the Fed keeps rates higher for longer, or even considers another hike. Reuters reported that markets are currently pricing a meaningful chance of a 25-basis-point Fed hike by December.

US business activity is still expanding, but at a slower pace. The latest US composite PMI held at 51.7 in May, showing growth, although the survey also pointed to weaker momentum and rising selling price inflation.

What this means for clients:

The Dollar is likely to remain sensitive to inflation data and geopolitical headlines. If US inflation surprises higher, GBP/USD could come under further pressure. For clients buying Dollars, recent pullbacks from 1.35 are a reminder that favourable levels can be short-lived.

Currency outlook

The overall picture remains uncertain.

Sterling is holding up reasonably well, but weaker UK data is limiting further upside. The Euro is being dragged down by poor growth figures, while the Dollar remains supported by safe-haven demand and the possibility of tighter Federal Reserve policy.

For clients with upcoming payments, this is a market where waiting for the “perfect” rate could be risky. Exchange rates are being driven by fast-moving headlines, and levels can change quickly.

Using forward contracts, partial hedging, and limit orders can help reduce the risk of being caught out by sudden market moves while still allowing some flexibility if rates improve.

Key events to watch this week

• US PCE inflation data – the main event for the Dollar and Federal Reserve expectations.
• Middle East developments – any escalation or de-escalation could move oil prices and safe-haven demand.
• Eurozone inflation data – important for the ECB’s next steps.
• Bank of England commentary – markets will be watching for clues on whether policymakers are more concerned about inflation or weaker UK growth.