MARKET REPORT
Sterling suffers worst week since November 2024 as political crisis deepens
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- USD delivers its strongest weekly performance since mid-March
- GBP suffers its worst week since November 2024
- Oil continues to surge as Iran war negotiations remain deadlocked
Recap
USD strength dominated all week; it was its best weekly performance since mid-March. Back-to-back US inflation reports and Fed officials warning the US has "got an inflation problem" and saw money markets price-in 16bp worth of rate hikes by December 2026. US 10-year Treasury yields rose to 4.58%, the highest in a year, while ten-year inflation expectations climbed above 2.50% – a level where rate hikes become increasingly warranted.Oil was a major driver throughout the week, with Brent crude surging more than 7% to around $108 per barrel – hitting $111 at one point – as Iran war negotiations remained at an impasse and the Strait of Hormuz stayed effectively closed. Trump's comments that the US does not need the Strait open pushed prices higher still, fuelling further global inflation concerns.
GBP suffered its worst week since November 2024. The political catalyst arrived Thursday: Health Secretary Wes Streeting resigned from cabinet, while Manchester Mayor Andy Burnham – the candidate markets fear most given his previous comments on fiscal rules – confirmed he would seek to return to Parliament via the Makerfield by-election. Nearly 100 Labour MPs have now called for Starmer to quit. UK 30-year gilt yields surged 20 basis points on Friday to 5.86% – the highest since 1998 – as markets priced in the risk of a looser fiscal stance.
JPY continued to weaken despite hawkish BOJ signal and Japanese Finance Minister Katayama reiterating that the government stands ready to intervene, keeping traders on alert.
Today
Market rates
*Daily move - against G10 rates as of 5pm BST on 15.05.26
** Indicative rates - interbank rates as of 5pm BST on 15.05.26
Our thoughts
Over the weekend, Labour's National Executive Committee gave the green light for Andy Burnham to run for selection in Makerfield by-election. Wes Streeting also threw is hat into the ring positioning himself for a leadership bid. USD has opened the morning stronger with oil prices rising after Trump once again put pressure on Iran to come to a deal and to reopen the Strait of Hormuz.Wednesday's UK CPI is the week's critical domestic release. Inflation is expected to ease to 3.0% from 3.3%, supported by lower household energy bills and base effects in services. However, fuel prices are set to partially offset that relief – and any upside surprise would compound fiscal concerns and intensify pressure on GBP at an already fragile moment. Tuesday's jobs data will also be watched closely, with wages expected to hold at 3.8% against a backdrop of softening labour demand.
The FOMC minutes on Wednesday evening could be the week's defining fundamental event for USD. Any hawkish signal that the Fed is seriously considering rate hikes rather than cuts would likely extend USD strength further across G10.
For EUR, Thursday's flash PMI is the key release. April's reading dropped sharply to 48.8, pointing to meaningful weakness in Q2 as energy prices bite. A further deterioration would present the ECB with a difficult dilemma – tightening into a weakening economy – and could weigh further on the single currency.
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