Oil prices eased again as hopes of a US-Iran deal took some heat out of the market. That has calmed some of the defensive mood that shaped the start of the week, leaving the dollar softer without removing the wider inflation risk from view.
Instead of one clean market move, pound, euro and dollar are each being pulled in a different direction. The pound looks steady but faces a domestic political test as voters go to the polls. The euro has the clearest support from renewed June European Central Bank rate hike talk. The dollar has lost some momentum, but still has firmer recent US data behind it.
For sterling, the Bank of England’s message from last week still matters, but it is no longer the freshest story. The 8-1 vote to hold rates on 30 April gave the pound some support, as policymakers kept their focus on inflation. Today, markets are watching whether local and devolved election results add to worries about the government’s authority, borrowing costs and confidence in the UK outlook.
The euro has a simpler story, even if the economy behind it is still far from convincing. European Central Bank officials have kept June tightening in the conversation, giving the single currency more support than sterling. The catch is growth. Eurozone annual inflation was 3.0% in April, while first-quarter gross domestic product (GDP) growth was only 0.1%, so the euro is leaning more on rate expectations than economic strength.
The dollar has softened as oil anxiety has cooled, but this is not yet a full change in direction. US services activity stayed in expansion in April and Friday’s non-farm payrolls report is the next big test. A firm jobs number could quickly bring the dollar back into favour.
For now, live currency direction points to a softer dollar rather than a stronger pound. Pound-dollar and euro-dollar have both edged higher, while pound-euro is broadly flat. That fits the wider picture: calmer oil markets are weighing on the dollar, while the euro’s rate story is cancelling out some of sterling’s election-day support.
GBP: Election nerves test the pound
Sterling is holding the support left over from last week's 8-1 Bank of England (BoE) vote to leave rates unchanged, with policymakers keeping their focus on inflation rather than easing. The harder question this morning is political, with voters at the polls in UK local, Scottish Parliament, Senedd and mayoral elections. The immediate sterling risk is whether a poor Labour showing reignites worries about government authority and UK borrowing costs ahead of the BoE's 18 June meeting.
GBP/USD: the past year
EUR: June rate talk helps the euro
The euro has the cleaner morning story, with European Central Bank (ECB) officials including Bundesbank President Joachim Nagel keeping a June rate hike firmly in play. The single currency is therefore drawing more support from rate expectations than from a convincing growth picture. With eurozone inflation at 3.0% in April against first-quarter gross domestic product (GDP) growth of just 0.1%, further ECB rhetoric and the eurozone calendar will set the next direction.
GBP/EUR: the past year
USD: Dollar pivots to payrolls
The dollar is softer this morning as the conflict premium drains away, with US equity benchmarks having closed at fresh record highs overnight on the deal headlines. Friday's non-farm payrolls release for April is now the next major test, with weekly jobless claims later today acting as a warm-up. A firm jobs number could quickly bring the dollar back into favour.
USD/GBP: the past year
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