FX Market Update: Dollar Softens, Euro Supported by Inflation, Sterling Driven by Risk Sentiment.

USD – Weakened after softer US GDP data and renewed optimism around a potential US-Iran ceasefire deal, though uncertainty remains.

EUR – Supported by firmer inflation data across the eurozone, reinforcing expectations of a hawkish ECB stance.

GBP – Sterling remains driven by external risk sentiment and oil headlines, with markets scaling back BoE rate hike expectations.

USD:

The dollar weakened after Q1 GDP was revised lower and reports suggested a 60-day ceasefire deal between the US and Iran was close to being agreed. However, uncertainty remains over approval from Iranian leadership and President Trump’s final signoff. Vice President JD Vance said a deal was “very close” but “not there yet”, with markets watching closely for any impact on oil flows through the Strait of Hormuz.

Core PCE was broadly in line with expectations, while Q1 annualised GDP growth was revised down from 2.0% to 1.6%. Today’s focus shifts to speeches from Fed officials Daly and Bowman, ahead of next Friday’s non-farm payrolls report.

EUR:

Attention in the eurozone is firmly on inflation this morning. French inflation accelerated to 2.8%, its highest since early 2024, while revised Q1 GDP confirmed the French economy contracted by 0.1% in the first quarter. Spanish CPI also edged higher to 3.6%, with German inflation expected at 2.8% later today.

Persistent inflation pressures are helping support expectations that the ECB will maintain a hawkish stance at its meeting in two weeks’ time, lending modest support to the euro despite softer growth signals.

GBP:

Sterling has mainly been driven by headlines surrounding Iran and oil markets in recent sessions, broadly tracking gains against the dollar yesterday as risk sentiment improved.

Today’s key focus is a speech from Bank of England Governor Andrew Bailey in Reykjavik. Market expectations for UK rates have shifted sharply, with traders now pricing in just one further BoE rate hike this year, compared with expectations for three hikes only a few weeks ago.

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