UK inflation slowed more than expected, weakening GBP as markets reduce Bank of England rate hike expectations. Meanwhile, rising US Treasury yields and hawkish Fed expectations continue to strengthen the US Dollar ahead of key FOMC minutes.
Key Highlight
- UK inflation slowed more than expected in April, with headline CPI easing to 2.8% versus forecasts of 3.0%. This reduced expectations for further Bank of England tightening and added pressure on Sterling.
- US Dollar strength continued as concerns around persistent inflation pushed US 30-year Treasury yields to their highest level since 2007, reinforcing expectations that the Federal Reserve could still raise rates again this year
- Markets are now heavily focused on tonight’s FOMC minutes, which could determine the next move for the USD. Any hawkish messaging from the Fed is likely to support the dollar further while weighing on both GBP and EUR.
- UK labour market data also weakened sentiment towards the Pound after employment figures showed the sharpest monthly drop in jobs since the pandemic, increasing concerns over slowing domestic growth.
- The Euro remained under pressure amid cautious market sentiment, rising energy concerns, and uncertainty around how the ECB will respond to inflation risks across the Eurozone.
Market Recap
The US Dollar strengthened through Tuesday’s session as rising inflation concerns drove Treasury yields higher, with the US 30-year yield climbing to 5.19%, its highest level since July 2007. Markets are now pricing in roughly an 80% probability of another Federal Reserve rate increase before year-end.
Risk appetite across global markets remained subdued despite geopolitical tensions easing slightly after President Trump cancelled a planned strike on Iran.
Sterling came under pressure following weaker UK employment data, with around 100,000 jobs lost in April, the largest monthly decline since the pandemic. The rise in unemployment to 5.0% prompted investors to further reduce expectations for Bank of England rate hikes this year, weighing on GBP performance.
The Euro also struggled amid broad USD strength and ongoing uncertainty surrounding the ECB’s response to energy-related inflation pressures. Attention now turns to upcoming Eurozone inflation data for further direction.
Elsewhere, the Australian Dollar was the weakest major currency after dovish Reserve Bank of Australia minutes combined with concerns over slowing Chinese growth and elevated oil prices. In Canada, softer inflation data reduced pressure on the Bank of Canada to tighten policy further despite headline inflation moving back above 3%.
Market Update
This morning’s UK inflation release reinforced expectations that UK price pressures may be easing in the short term. Headline CPI fell to 2.8% from 3.3% previously, while core inflation also came in slightly below expectations.
A key driver behind the softer reading was lower household energy costs linked to government support measures. However, markets remain cautious about how sustainable this slowdown will be, particularly as rising fuel and energy prices linked to the Iran conflict could feed back into inflation later in the year.
The softer inflation data triggered a rally in UK government bonds, with 10-year gilt yields falling sharply, while expectations for further Bank of England tightening were reduced again. As a result, Sterling weakened further, although moves have remained relatively contained so far.
With both employment and inflation data now surprising to the downside, the near-term outlook for GBP has become more challenging. However, investors remain aware that the decline in inflation may prove temporary rather than signalling a lasting easing in underlying price pressures.
The focus for markets today will be the release of the FOMC minutes this evening. Investors will be looking for any indication that the Federal Reserve remains concerned about inflation or is considering keeping rates higher for longer. Any hawkish tone from the minutes would likely provide additional support for the US Dollar and place renewed pressure on GBP/USD and EUR/USD moving into the end of the week.
20th May 2026
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