- Starmer’s power struggle and the associated political risks are weighing on the pound.
- A potential new energy crisis is looming over the euro.
The US dollar reacted calmly to the April US inflation data. Consumer prices surged to a three-year high of 3.8% y/y, raising the chances of the Fed tightening monetary policy this year to 33%, from 16% a week earlier. The date when the probability of a rate hike from current levels exceeds 50% has now shifted from April to March 2027.
The biggest problem is the rise in energy prices. These are always volatile, and monetary policy can do little to address them. Therefore, central banks generally focus on core inflation. In April, it rose to 2.8%. The figure is moving further away from the 2% target and, due to second-order effects, could rise further. On the other hand, CPI indices remain well below their 2022 levels, so there is no need yet for the Fed to tighten monetary policy aggressively.
Meanwhile, MUFG highlights the depletion of gas stocks in the Amsterdam–Rotterdam–Antwerp energy hub. Natural gas prices in Europe have not risen as sharply as they did four years ago, due to full storage facilities. However, should the situation deteriorate, the risk of a decline in the EURUSD exchange rate will begin to mount.
Goldman Sachs cites the ongoing energy shock, the strength of the US economy, high inflation, and the associated rise in Treasury bond yields as arguments in favour of selling EURUSD. The bank also recommends buying the US dollar against the pound and the Swedish krona.
The British pound recorded its worst daily fall since early April. Following Labour’s defeat in the local elections, an increasing number of party members are calling for Keir Starmer to step down as leader. The Polymarket betting market has raised the probability of such an outcome by the end of 2026 from 48% to 66% in just a few days.
Investors fear that the government will be led by a proponent of fiscal stimulus, reigniting the conflict between loose fiscal policy and tight monetary policy, as in 2022. At that time, GBPUSD plummeted to a historic low. So far, parallels can only be seen in the debt market, where, against a backdrop of bond sell-offs, yields on 30-year Gilts have risen to their highest level since 1998.
