As we approach ten years since the Brexit vote that knocked 15% off the value of the pound against the euro, and only slightly less against the US dollar, is the pound in the middle of another crunch period?
Not to judge by recent movements. Despite the oil crisis – now potentially easing – and a political crisis in the UK government that could see a sharp move to the political left, and still with tariffs in the background, sterling has been marching on reasonably serenely over the past few weeks against the euro.
May is a month when many of us get into gear with exciting plans such as buying a home overseas or a healthier and more adventurous retirement in a new country, so are exchange rates helping or hindering that?
GBP: Pound shrugs off politics
There was a moment last week when the pound looked like it might be slipping down in response to the political turmoil in the UK. However, it recovered just as surely and GBP/EUR remains firmly within the band it has been in since last July.
The three factors governing sterling’s movements right now are the economic performance of the UK, the oil crisis in the Straits of Hormuz and the fate of the current prime minister.
In no particular order, with the Iran War ceasefire sterling has benefited from a shift to a “risk-on” attitude. Risk on and risk off refer to the mood of large-scale investors to put their money into riskier entities and commodities. These days sterling – based on services and business performance – is regarded as riskier than the US dollar, Japanese yen and Swiss franc (and maybe the euro). So when the missiles are heading into Iran and ships can’t get through the Straits of Hormuz, the pound should weaken. That’s not been happening lately, oil is down below $100 per barrel and investors have been willing to take a punt on riskier assets once again, hence sterling staying strong.
But what of the UK economy? The Bank of England held its interest rate at 3.75% in March and again in April, but less than a month until their next decision, this has been a week of infuential economic data. It’s been good and bad for the economy, but that doesn’t necessarily transfer to the strength of the pound. So, in order that it was revealed, GDP rose by 0.8% in the first quarter of 2026 – much above expectations and definitely positive for sterling. On Tuesday we had unemployment rising and earnings not rising fast at all. That makes interest rate rises less likely and would be negative for sterling. On Wednesday, inflation was revealed to be just 2.8%, when above 3% had been predicted. That’s good for the country, but not good news for sterling as it means, again, that interest rate rises are not imminent. FInally, this morning (Thursday 21 May) we had the Purchasing Managers’ Index (PMI) which was very poor for UK services – our dominant economic sector.
Finally UK politics, and at the time of writing we are waiting for a leadership challenge against Keir Starmer following the local election results. While tricky Labour Party rules and procedures have stymied his rivals so far, a challenge from the Left (Andy Burnham, Angela Rayner or Ed Miliband) could hit sterling.
GBP/EUR past year
EUR: ECB in driving seat
The euro has generally weakened over the past month, but very marginally against the pound and US dollar and rather more against currencies like NOK and the yen.
Supply routes through the Strait of Hormuz seem to be loosening up and oil is getting cheaper. But his wasn’t in time to save the latest PMI results from European businesspeople. With PMI, anything over 50 denotes a positive mood for business and under 50 suggests business negativity. For services PMI, while the UK was 47.9, Germany was 47.8 and France at its worst since 2020 at 42.9. However, in the eurozone manufacturing is more important and that was a pretty positive 51.4 across the bloc.
The question that currency markets will be asking is what that all means for interest rates. The ECB’s next decision is on 11 June.
EUR/USD past year
USD: Iran easing helps dollar
Last week Kevin Warsh took over as chair of the US Federal Reserve, replacing long-term chair Jerome Powell. President Trump may have first appointed Powell in 2018 but had come to heartily loathe Powell’s refusal to lower interest rates in the past few months. Warsh aims to do so, but he has only one vote on a 12-member panel, and with inflation moving upwards (ironically as a result of Trump’s own actions on tariffs and Iran) he will be limited.
However, again, the oil price has now fallen, so maybe this will not feed through into inflation as much as feared. Last week inflation moved up a little – to 3.8% – but more worrying PPI (producer price inflation), an inflation early warning, shot up to its highest since March 2022.
The move from likely interest rate cuts to interest rate increases has helped the dollar, but it’s helped other currencies too so the impact has been limited.
USD/GBP past year
What’s coming up: key events to watch
Looking ahead, several important economic events could influence exchange rates over the next couple of weeks:
- EU, GfK Consumer Confidence (22 May)
- UK, Retail Sales (22 May)
How to protect your own budget
Exchange rates can shift quickly – and when you’re moving large sums for a property purchase, that can mean thousands gained or lost. Speak to a currency specialist to discuss tools like forward contracts, which let you lock in an exchange rate for the future, shielding your budget from adverse movements.
