GBP/USD + GBP/EUR Market Update

Sterling Retreats on Labour Leadership Turmoil as US Retail Sales Beat and ECB June Hike Odds Fade; GBP/USD Slips to 1.3367, GBP/EUR Softens to 1.1484, EUR/USD Holds 1.1640, Friday, 15 May 2026

GBP/USD: 1.3367 | GBP/EUR: 1.1484 | EUR/USD: 1.1640

GBP/USD has fallen sharply from Thursday's 1.3514 close, weighed by a combination of domestic political risk and a firmer dollar following Wednesday's strong US April retail sales data. Political pressure on Prime Minister Keir Starmer has intensified following the resignation of Health Secretary Wes Streeting, who is expected to launch a leadership bid, while Angela Rayner was cleared by HMRC in a tax investigation, potentially clearing her path to enter the race. EUR/USD has also drifted lower from the 1.1712 level seen on Thursday, with Bloomberg reporting that a June ECB rate hike is becoming less obvious, as oil prices have not spiked as high as feared and the euro-zone economy is stagnating. Today's key event risk is the University of Michigan preliminary consumer sentiment reading for May (15.00 London).

Overnight & Market Tone:

The 10-year gilt yield eased to 5.01% on 14 May, a 5 basis-point decline from the prior session, though it remains roughly 25 basis points higher over the past month. Gilt yields had edged down to around 5.03% as investors focussed on optimism surrounding the US-China summit and the UK's solid Q1 GDP outturn of 0.6%, with annual growth reaching 1.1%. However, the political headlines have since reasserted themselves and GBP/USD has retreated to the 1.3367 area, consistent with the database levels provided. Risk sentiment is cautiously constructive globally following the Trump-Xi summit conclusions, though the Strait of Hormuz remains closed and Brent crude is holding above $100 per barrel, keeping energy-driven inflation concerns alive. Markets are now pricing in nearly three Bank of England rate hikes by year-end, reflecting the persistent elevation in energy costs.

UK Data & Bank of England:

The domestic data backdrop is mixed. UK CPI was 3.3% in the 12 months to March, above the MPC's 2% target. Services inflation was 4.5% in March, up from 4.3% in February, a stickiness that will concern the MPC. Retail sales volumes rose 1.6% in Q1 2026 compared with Q4 2025, with March volumes up 0.7% after a revised fall of 0.6% in February. On the GDP side, the UK economy grew 0.6% in Q1 2026, with annual growth at 1.1%, exceeding expectations, driven by March's unexpected 0.3% expansion. The BoE held Bank Rate at 3.75% at its 29 April meeting. The MPC voted 8-1 to maintain Bank Rate at 3.75%, with one member voting to increase it by 0.25 percentage points to 4%. The MPC noted that CPI inflation is likely to be higher later this year as energy price effects pass through, flagging a risk of material second-round effects in price and wage-setting, while also acknowledging that a weakening economy could contain inflationary pressures. BoE Deputy Governor Sarah Breeden stated that the Middle East conflict is "much less likely" to spark an inflation surge like in 2022, adding that any necessary rate hikes could wait until later this year. The next MPC decision is scheduled for 18 June. OIS pricing implies markets are pricing close to three 25bp hikes through year-end, though the probability of a move at the June meeting specifically remains well below 50% given the MPC's stated preference to observe further data before acting.

European Backdrop & EUR/USD:

The ECB kept all three key rates unchanged at its 30 April meeting, noting that upside risks to inflation and downside risks to growth have intensified. Eurozone inflation accelerated to 2.6% in March, the highest since July 2024, driven by rising energy costs. At the post-meeting press conference, ECB President Christine Lagarde said the decision to hold was unanimous, though policymakers debated various options including a possible hike, and she added that the ECB is "certainly moving away" from its baseline scenario. However, the June hike narrative has shifted materially this week. Bloomberg reports that two weeks after Lagarde put investors on alert that the ECB was moving toward raising rates, a June hike is becoming less obvious, as oil prices have not spiked as high as feared, there is no wider inflation spillover yet from the ramp-up in energy costs, and the euro-zone economy is stagnating. Despite the ECB's cautious stance, markets had been fully pricing in three ECB rate hikes in 2026, with the first potentially arriving as early as June, but that pricing is now being pared back. Services PMI for the euro area as a whole was 47.6, with Germany at 46.9 and France at 46.5, confirming the underlying growth weakness that is complicating the ECB's calculus. The IMF trimmed its 2026 Eurozone growth forecast to 1.1%, with Germany continuing to underperform while Southern Europe shows relative strength.

For EUR/USD specifically, the pair has retreated from Thursday's 1.1712 to around 1.1640 this morning, a move of roughly 70 pips. The driver is a combination of fading ECB June hike expectations (per Bloomberg) and a modestly firmer dollar following the US retail sales beat. EUR/USD has recovered from its March low of 1.1435, driven by dollar weakness and expectations that any future ECB move would tighten rather than ease, but that narrative is being tested. For a sustained break above 1.18, markets need either a geopolitical breakthrough or a clear ECB signal of a hike at the June meeting. With neither condition met today, the near-term bias for EUR/USD is modestly lower. The ECB's next scheduled meeting ends on 11 June, one week before the FOMC's 16-17 June gathering, meaning the policy differential debate will intensify over the coming four weeks. Treasurers with direct EUR/USD exposures should note that the pair is now trading below the week's open and the 1.1640 area represents a test of the mid-range of the 1.1435-1.1765 recovery band.

US Backdrop:

In April 2026, core retail sales rose a solid 0.5%, after an upwardly revised 0.8% gain in March, providing the dollar with a supportive data point heading into the weekend. The FOMC is maintaining the target range for the federal funds rate at 3.5% to 3.75%, and Kevin Warsh is expected to be in-seat for the next rate decision on 16-17 June, though it seems very unlikely that a Warsh-led Fed will quickly pivot to lowering interest rates. Consumer sentiment broke an all-time record low, with the University of Michigan's survey showing sentiment falling to a preliminary reading of 48.2 in early May, the weakest in the survey's history stretching back to 1952; the final May reading is due today at 15.00 London and could move the dollar if it diverges from the preliminary print.

Technical Picture:

GBP/USD: Resistance at 1.3446 (100-day EMA), 1.3514 (Thursday's close), 1.3593-1.3604 (May/August 2024 highs confluence). Support at 1.3367 (current spot), 1.3300 (psychological), 1.3200 (March recovery base).
GBP/EUR: Resistance at 1.1539 (Thursday's close), 1.1600 (round number), 1.1650 (recent range high). Support at 1.1484 (current spot), 1.1435 (mid-April low), 1.1380 (Q1 floor).
EUR/USD: Resistance at 1.1700 (psychological), 1.1712 (Thursday's close), 1.1765 (late April high). Support at 1.1640 (current spot), 1.1580 (short-term pivot), 1.1500 (key structural level).
Outlook: GBP/USD is testing the lower end of its week's range and risks a further drift toward 1.3300 if the Starmer leadership situation deteriorates further, while EUR/USD's failure to hold above 1.1700 opens a path toward the 1.1580 pivot; GBP/EUR is range-bound but biased lower while domestic political uncertainty persists.

Today's Calendar:

The University of Michigan final sentiment reading at 15.00 is the key event risk: any upward revision from the record-low 48.2 preliminary print could provide modest dollar support into the weekend close, while a further deterioration would add to "stagflation" concerns and potentially weaken the dollar broadly.

Outlook:

GBP/USD faces a difficult weekend with the Labour leadership contest unresolved, gilt yields near multi-decade highs, and the dollar supported by solid US data; a break below 1.3300 cannot be ruled out if Starmer's position deteriorates further, while any resolution or stabilisation of the political situation could see a recovery toward 1.3450. EUR/USD's near-term bias is modestly lower given fading ECB June hike pricing, with the 1.1580 support level the key line to watch; the 11 June ECB meeting and 16-17 June FOMC will together define the pair's next directional move, and treasurers with unhedged EUR/USD exposure should consider whether current levels offer a reasonable entry point for forward cover ahead of that two-week window.

This commentary is provided for informational purposes only and should not be construed as investment, legal, or tax advice. Past performance is not indicative of future results. Please consult with qualified professionals before making any financial decisions. Vantry Capital Ltd is authorised and regulated by the Financial Conduct Authority.