GBP/USD + GBP/EUR Market Update

Sterling Caught Between Weak Services PMI and Hawkish Fed Repricing, as EUR/USD Holds Above 1.1600 Ahead of UK Retail Sales, Friday, 22 May 2026

GBP/USD: 1.3425 | GBP/EUR: 1.1564 | EUR/USD: 1.1609

GBP/USD has drifted back toward 1.3425 after briefly touching 1.3480 on Wednesday, with the pair unable to sustain gains following a sharp miss in Thursday's UK flash services PMI and a broadly firmer dollar after the April FOMC minutes signalled the Fed is considering removing its easing bias. GBP/USD held steady below 1.3450 in European trading on Thursday, with a sharp slowdown in UK inflation and uncertainty surrounding US-Iran talks checking upside attempts. EUR/USD is holding just above 1.1600, supported by ECB rate-hike pricing, while GBP/EUR has slipped to 1.1564 as the euro outperforms on relative central bank divergence. Today's focus is squarely on the ONS April retail sales release at 07.00am and any further Middle East developments.

Overnight & Market Tone:

UK 10-year gilt yields fell to 4.95%, pulling back from multi-year highs, as investors digested flash PMI data showing the UK economy contracted in May amid rising political uncertainty and the escalating impact of the Middle East conflict, with businesses reporting falling output, surging inflation, supply shortages, and job cuts. The contraction followed earlier data showing April inflation undershot expectations and the jobs market weakened unexpectedly, complicating the Bank of England's policy path. US 10-year Treasury yields are around 4.61%, Brent crude futures are near $110.89, and the VIX stands at approximately 17.98. FTSE 100 futures are pointing to a cautious open, consistent with the risk-off tone from the PMI shock. The dollar index (DXY) is holding near 99.40, underpinned by the hawkish FOMC minutes released on Wednesday.

UK Data & Bank of England:

The ONS confirmed that CPI rose by 2.8% in the 12 months to April 2026, down from 3.3% in March. The 2.8% print was below expectations and provided the first indication of how the Middle East conflict had impacted the UK economy. Despite the headline relief, the MPC is not in a position to ease: at its meeting ending 29 April, the MPC voted 8-1 to maintain Bank Rate at 3.75%, with one member voting to increase by 25 basis points to 4%. The conflict in the Middle East means prospects for global energy prices are highly uncertain, and monetary policy will be set to ensure the economic adjustment achieves the 2% inflation target sustainably, with the policy stance depending on the scale and duration of the shock. On 30 April, the Bank projected CPI at 3.1% in Q2, 3.3% in Q3, and rising further in Q4 due to higher energy and food prices. The next MPC decision is 18 June. Payrolls fell by 100,000 in April, the largest drop since May 2020, while unemployment rose to 5% and wage growth slowed to 3.4%; markets now anticipate only two BoE rate increases by December. Thursday's flash PMI data delivered a further blow: the S&P Global UK Services PMI fell to 47.9 in May from 52.7 in April, missing forecasts of 51.7, with firms citing greater economic hesitancy, weaker investment sentiment, delayed consumer spending due to the Middle East war, and domestic political uncertainty weighing on client confidence. By contrast, UK Manufacturing PMI held steady at 53.7 in May, unchanged from April and well above market expectations of 53. The combination of a contracting services sector and still-elevated inflation is a classic stagflationary signal that limits the MPC's room to manoeuvre in either direction. Today's April retail sales release (07.00am) is the next key domestic input; the ONS confirmed the release date as 22 May, though the data had not yet been published at the time of writing.

European Backdrop & EUR/USD:

The ECB deposit rate is 2.00%, held unchanged at the 30 April 2026 meeting, a level maintained since the last ECB cut in June 2025. The next decision is 11 June 2026, with markets pricing an 86% probability of a 25bp hike, which would take the deposit rate to 2.25%, with three hikes priced into year-end. This is a striking shift from late March, when consensus expected the ECB to remain on hold through Q3. The pivot in ECB expectations has been driven by the inflation backdrop: eurozone headline inflation jumped to 3.0% in April from 2.6% in March, driven almost entirely by energy, while core inflation held at 2.2%. Q1 GDP grew 0.8% year-on-year, though the IMF cut its 2026 eurozone growth forecast to 1.1% in its April World Economic Outlook, down from 1.4%. Germany continues to underperform, with the May ZEW indicator of economic sentiment at -10.2. The ECB has noted that the Middle East conflict will push up near-term inflation. On EUR/USD specifically: EUR/USD stayed in its daily range above 1.1600 in the European session on Thursday, with the pair holding its ground despite disappointing May PMI data from the eurozone and France, as renewed optimism about a US-Iran peace agreement made it difficult for the dollar to gather strength. The pair is trading near the lower end of its recent 1.1600-1.1750 range. The ECB-Fed policy differential is the dominant driver: the ECB is moving towards tightening while the Fed is on hold with a hawkish tilt, a configuration that is broadly supportive for EUR/USD but creates a ceiling given the dollar's safe-haven bid from Middle East risk. The base case range for EUR/USD in Q2-Q3 2026 is 1.15-1.19. For treasurers with direct EUR/USD exposures, the 11 June ECB meeting is the key event risk: a hawkish hike could push EUR/USD towards 1.19 within hours, while a surprise hold could pull it back to 1.16. Political risk in the UK is also weighing on GBP/EUR: Andy Burnham, the frontrunner among potential leadership challengers to Prime Minister Keir Starmer, ruled out changing the government's borrowing limits, easing fears of looser fiscal policy, while Starmer insisted he would not step down even if Burnham wins the by-election, setting the stage for a possible leadership contest. This domestic political uncertainty is an additional headwind for sterling against the euro.

US Backdrop:

The Fed kept the federal funds rate unchanged at the 3.5%-3.75% target range for a third consecutive meeting in April, with the 8-4 vote marking the first time since October 1992 that four officials dissented against a FOMC decision. The April FOMC minutes, released Wednesday, showed many participants indicated they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of future interest rate decisions. According to the CME FedWatch Tool, markets are currently pricing in a nearly 60% probability of the Fed raising the policy rate by 25 basis points at least once by the end of the year. Brent crude held near four-year highs after President Trump said Iran negotiations were in the "final stages" but warned of renewed military action if Tehran rejected his terms. The US calendar today is light, leaving geopolitical headlines and the UK retail sales print as the primary near-term catalysts.

Technical Picture:

GBP/USD: Resistance 1.3468 (50-day EMA), 1.3480 (Wednesday high), 1.3530. Support 1.3405 (200-day EMA), 1.3399 (Thursday session open), 1.3350.
GBP/EUR: Resistance 1.1600, 1.1640, 1.1680. Support 1.1540, 1.1510, 1.1480.
EUR/USD: Resistance 1.1650, 1.1700, 1.1733 (12 May high). Support 1.1600, 1.1560, 1.1500.
Outlook: GBP/USD sits between the 200-day EMA at 1.3405, which underpins price as near-term support, and the 50-day EMA at 1.3468, which acts as immediate resistance; a sustained break above 1.3468 would open a more constructive short-term tone, while a clear drop below 1.3405 would expose further weakness. EUR/USD's hold above 1.1600 keeps the near-term bias modestly constructive for the euro, though a break below that level on a strong dollar session would shift the picture towards 1.1500.

Today's Calendar:

The ONS April retail sales release at 07.00am is the pivotal domestic event: given Thursday's services PMI collapse to 47.9, a soft print would reinforce the stagflationary narrative and likely push GBP/USD back towards 1.3399-1.3405 support, while an upside surprise could provide a brief recovery towards 1.3468.

Outlook:

GBP/USD faces a difficult near-term path: the services PMI contraction, a loosening labour market, and hawkish Fed repricing all argue for a range of 1.3350-1.3480 into the 18 June MPC meeting, with the balance of risks skewed to the downside absent a resolution of Middle East tensions. EUR/USD is better supported by ECB hike pricing, and the 11 June ECB decision represents the single largest binary risk for treasurers managing EUR/USD exposures this quarter; a confirmed 25bp ECB hike alongside a Fed hold would likely push the pair to the upper end of the 1.15-1.19 range.

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 Inc. is authorised and regulated by the Financial Conduct Authority.