US Inflation Surprise Boosts Dollar as GBP Slides on UK Political Uncertainty

Key Highlight

• US inflation pressures remain sticky, reinforcing expectations that the Federal Reserve may keep interest rates elevated for longer. This supported a broader USD rally following stronger-than-expected core CPI data.

• Sterling underperformed across the G10 as UK political uncertainty intensified, weighing heavily on investor confidence and pushing long-dated gilt yields to levels not seen since 1998.

• Markets continue to favour defensive positioning amid ongoing geopolitical uncertainty in the Middle East, helping sustain demand for the US dollar and keeping oil prices supported.

Market Recap

The US dollar strengthened after April’s US CPI report surprised to the upside, with core inflation exceeding forecasts and reinforcing the market’s higher-for-longer interest rate narrative. While some components of the data were distorted by technical adjustments within housing calculations, underlying inflation pressures remained firm enough to keep expectations for restrictive Fed policy intact.

Particularly notable was the acceleration in “super core” inflation, which reached its fastest pace since January, alongside continued increases in food prices. Together, these signals reduced confidence that inflation is easing quickly enough for the Fed to shift towards rate cuts anytime soon.

Meanwhile, GBP was the weakest performer in the G10 FX space as investors focused on mounting political instability in the UK. Although Prime Minister Keir Starmer managed to avoid an immediate internal revolt following Cabinet discussions and public support from Labour MPs, markets remain cautious over the possibility of senior resignations that could reignite leadership speculation.

This uncertainty pushed UK 30-year gilt yields to their highest levels since 1998, reflecting concerns around political stability, fiscal credibility, and investor appetite for UK assets.

Market Update

Attention now turns to US Producer Price Index (PPI) data due this afternoon. Following yesterday’s strong CPI release, another upside inflation surprise would likely strengthen expectations that the Fed may need to maintain restrictive policy for longer, potentially extending recent USD gains. Markets are currently forecasting monthly PPI growth of 0.5% and annual growth of 4.9%.

In Europe, final French CPI and Eurozone GDP figures are expected to confirm earlier estimates, meaning the releases are unlikely to generate significant EUR volatility unless revisions emerge.

For the pound, political developments remain the dominant driver. With no major UK economic releases scheduled, GBP sentiment is likely to remain highly sensitive to headlines surrounding Labour leadership stability and any signs of Cabinet fractures.

Geopolitical risks also continue to influence market sentiment. Uncertainty surrounding a potential US-Iran ceasefire remains unresolved, supporting elevated oil prices and maintaining safe-haven demand for the dollar. Until tensions ease more decisively, markets are likely to remain biased towards defensive USD positioning.

13th May 2026

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