Sterling Slips as Markets Focus on Middle East Tensions and U.S. Inflation Data
Sterling moved slightly lower on Monday as investors reacted to the ongoing deadlock in Middle East ceasefire negotiations while preparing for a crucial week of U.S. inflation data. The pound also faced additional pressure from growing political uncertainty in the United Kingdom following last week’s local election results.
At 07:10 ET (11:10 GMT), GBP/USD declined 0.18% to 1.3609, while EUR/USD slipped 0.11% to 1.1773.
Dollar Strengthens as Risk Sentiment Weakens
The U.S. dollar gained modest support at the beginning of the week after hopes for a Middle East ceasefire failed to materialize over the weekend. Expectations for diplomatic progress had increased ahead of U.S. President Donald Trump’s scheduled visit to China on Thursday, but market optimism faded after Trump described Iran’s latest proposal as “totally unacceptable.”
As geopolitical tensions intensified, oil prices moved higher while global equity markets weakened slightly, reflecting a broader decline in investor risk appetite.
Analysts at ING stated that unless Beijing unexpectedly brokers a breakthrough agreement, markets are likely to continue pricing in a prolonged impasse. According to the bank, this scenario could keep oil prices elevated and increase global inflationary pressures.
ING also warned that the broader stagflationary impact has not yet been fully reflected in markets, making a sustained U.S. dollar selloff difficult to justify. The bank expects the U.S. Dollar Index (DXY) to remain within the 98.00–98.50 range in the near term.
Markets Await Key U.S. CPI Inflation Report
Investor attention is now firmly focused on Tuesday’s U.S. Consumer Price Index (CPI) report for April. Headline inflation is forecast to rise to 3.7% year-over-year from 3.3%, while core inflation is expected to edge higher to 2.7% from 2.6%.
Money markets have increasingly shifted toward pricing in potential Federal Reserve rate hikes later this year as inflation expectations rise again.
This week will also feature speeches from two hawkish Federal Open Market Committee (FOMC) members, Neel Kashkari and Beth Hammack. ING noted that stronger-than-expected inflation data could provide further support for the dollar.
Additional economic releases this week include Producer Price Index (PPI) data on Wednesday and U.S. Retail Sales figures for April on Thursday.
Political Uncertainty Adds Pressure on Sterling
Sterling also faced domestic political challenges on Monday as speculation surrounding Labour Party leadership tensions continued following the local council election results.
Manchester Mayor Andy Burnham is reportedly being closely watched for signs of a possible return to parliament, fueling discussions about the future political direction of the Labour Party.
Investors are also monitoring a policy speech from Prime Minister Keir Starmer, particularly regarding the possibility of closer economic ties between the United Kingdom and the European Union. Discussions around a potential customs union arrangement or even re-entry into the single market remain key issues for markets.
ING cautioned that both sterling and UK government bonds entered the week with very little political risk priced in, leaving the pound vulnerable if uncertainty intensifies further.
EUR/USD Outlook Remains Fragile
For the euro, ING noted that EUR/USD has remained relatively resilient thanks to a softer dollar environment and positive market flows from Asia. However, the bank said the broader outlook for the euro remains weak due to disappointing economic activity data across the eurozone.
Markets are currently assigning an 82% probability to a 25-basis-point European Central Bank rate hike on June 11, which analysts believe is helping prevent EUR/USD from falling back toward the 1.15 level.
ECB President Christine Lagarde and ECB chief economist Philip Lane are both scheduled to speak on Wednesday.
According to ING, unless there is a major breakthrough in Middle East peace negotiations, the greater near-term risk for EUR/USD is a decline below 1.1700 rather than a move above 1.18.
