GBP/USD + GBP/EUR Market Update

Sterling and Euro Hold Monday's Gains as Iran Deal Optimism Fades Into Tuesday, With Brent Below $100 and Warsh's Fed Debut in Focus, Tuesday, 26 May 2026

GBP/USD: 1.3475 | GBP/EUR: 1.1578 | EUR/USD: 1.1638

All three pairs enter Tuesday's session carrying the momentum of Monday's risk-on move, itself triggered by weekend reports that a US-Iran ceasefire framework was "largely negotiated." The dollar nursed losses on Tuesday as investor optimism over a deal to reopen the Strait of Hormuz boosted risk appetite, with hopes of peace pushing Brent below $100 a barrel. However, the US Central Command confirmed it had carried out fresh strikes "to protect our troops from threats posed by Iranian forces," keeping the geopolitical backdrop two-sided and the risk rally fragile. With no high-impact UK data today, Middle East headlines and the first full US session of the week (markets were closed Monday) will set the intraday tone.

Overnight & Market Tone:

The dollar slipped at the start of Asian trading on Monday as hopes of a Strait of Hormuz deal pushed oil below $100, with the euro rising 0.3% to $1.1642 and the pound gaining 0.4% to $1.3485. EUR/USD was trading in negative territory around 1.1635 during the early Asian session on Tuesday, suggesting some of Monday's gains are being given back as the deal optimism cools. UK 10-year gilt yields dropped below 4.9% to their lowest level since 21 April, posting their sharpest weekly decline since 2024, as investors cheered progress in US-Iran negotiations and trimmed BoE rate hike expectations amid weak economic data. The FTSE 100 closed at 10,474 on Friday, gaining 31 points or 0.30%, and futures point to a modestly firmer open this morning. The VIX closed at 16.59 on Friday, down 0.66%, while Brent crude futures were trading around $93.65, down over 6.5% on the session. Risk sentiment is cautiously positive but the thin liquidity from Monday's US holiday means Tuesday's New York open will be the first real test of conviction.

UK Data & Bank of England:

The domestic data backdrop remains firmly in the "stagflationary drag" camp that has characterised the past fortnight. April retail sales slumped 1.3%, nearly double forecasts, while May PMI readings signalled the first private sector contraction in a year, reinforcing the shift in rate expectations. The UK's budget deficit also swelled to £24.3 billion in April, surpassing the £20.9 billion estimate and marking the highest April shortfall since 2020. These prints, combined with the softer April CPI of 2.8% (reported last week), have materially repriced the June MPC meeting. Together with earlier reports of weak inflation, a softening jobs market, and May PMI signalling private sector contraction, the figures prompted traders to scale back bets on Bank of England interest rate hikes. The MPC itself remains divided. At its meeting ending 29 April 2026, the MPC voted 8-1 to maintain Bank Rate at 3.75%, with one member voting to increase Bank Rate by 0.25 percentage points to 4%. That lone dissenter was Chief Economist Huw Pill. Governor Andrew Bailey said what happens next "will depend on the size and duration of the energy price shock," while Deputy Governor Sarah Breeden told the FT "we don't need to rush," and Pill compared the Bank's next moves to the crew of Apollo 13 making manual course corrections. On 30 April, the Bank projected CPI at 3.1% in Q2, 3.3% in Q3, and "to rise somewhat further in Q4" due to higher energy and food prices. OIS markets, which had been pricing a meaningful probability of a June hike as recently as last week, have now trimmed those bets sharply in response to the run of soft data. Investors now await speeches from BoE policymakers later this week for monetary policy signals, as well as political developments surrounding Prime Minister Keir Starmer after Labour's regional election defeats this month. Any MPC speaker today who pushes back against the dovish repricing would be a material GBP positive.

European Backdrop & EUR/USD:

The ECB's 11 June meeting is now the dominant near-term driver for EUR/USD. The ECB deposit rate stands at 2.00%, held unchanged since the last cut in June 2025. The ECB kept rates on hold at its April meeting despite a surge in eurozone inflation since the Iran war began, maintaining the deposit facility rate at 2%. Flash data showed inflation in the eurozone jumped to 3.0% in April, driven largely by a rise in energy costs. The April hold was not without internal debate: ECB President Christine Lagarde said the decision to hold was unanimous, though policymakers debated various options, including a possible hike. Since then, hawkish signals have intensified. Recent hawkish signals from ECB officials including Isabel Schnabel (7 May) and Martin Kocher (11 May) bolster expectations for action absent sharp disinflation. Market pricing now implies a high probability of a 25bp hike to 2.25% at the June meeting: trader consensus prices a 76.5% implied probability for a 25bp hike in the ECB's deposit facility rate at the 11-12 June meeting, reflecting April 2026 eurozone CPI surging to 3.0% from 2.6% amid energy price spikes tied to the Iran war. For EUR/USD specifically, the pair has recovered sharply from its March low and is now trading near 1.1638, supported by the combination of a softer dollar and ECB hike expectations. The euro area annual inflation rate was 3.0% in April 2026, after printing at 2.6% in March, while EU-wide annual inflation was 3.2% in April, up from 2.8%. The ECB is widely expected to deliver a rate hike in June, after keeping rates unchanged in April, with the next monetary policy decision scheduled for 11 June. The pair's near-term ceiling is being tested: initial resistance sits at 1.1660, the recent weekly top, followed by the 1.1690 region where multiple moving averages converge, a level likely to hold in a risk-averse scenario and without a clear Iran deal. On the downside, the broader trend is underpinned by the weekly low, with additional losses exposing a long-term static support area at 1.1470. The structural argument for EUR/USD is that the ECB-Fed rate differential is moving in the euro's favour: the ECB is expected to hike while the Fed is firmly on hold through at least year-end. However, OCBC strategists note "there is no strong case to be bearish USD," citing resilient US growth and AI-driven inflation pressures that have nudged Fed rhetoric in a more hawkish direction. Treasurers managing direct EUR/USD exposures should treat 1.1580-1.1660 as the near-term range, with a confirmed Iran deal the catalyst for a move toward 1.1740. A second risk has emerged: Trump has threatened "much higher" tariffs on EU goods unless the bloc eliminates its own tariffs on US products by 4 July, and a breakdown in EU-US trade talks would be euro-negative.

US Backdrop:

Kevin Warsh was sworn in as the 17th chair of the Federal Reserve on 22 May 2026, stepping into the role at what many consider the most politically charged monetary policy environment in a generation, inheriting a federal funds rate steady at 3.50%-3.75% and a committee that produced four dissents at its most recent meeting. Warsh is scheduled to chair his first FOMC policy meeting on 17 June. With inflation still high, financial markets currently think the Fed is far more likely to raise rates than cut them this year; investors believe there is a more than 80% chance the FOMC will leave rates stable in June and July, and by December the odds of a rate hike are nearly 70%, according to CME FedWatch. Consumer prices rose 0.6% month-on-month in April, putting the 12-month CPI rate at 3.8%, the highest since May 2023. The US calendar this week includes Conference Board consumer confidence (Tuesday) and the second estimate of Q1 GDP (Thursday), both of which will be watched for any softening that could ease the hawkish repricing and weigh on the dollar.

Technical Picture:

GBP/USD: Resistance at 1.3500 (psychological/recent high), then 1.3530 and 1.3580 (downtrend reference). Support at 1.3430 (clustered moving average zone), then 1.3380 and 1.3320.
GBP/EUR: Resistance at 1.1600 (round number), then 1.1630 and 1.1680. Support at 1.1540 (recent range floor), then 1.1490 and 1.1430.
EUR/USD: Resistance at 1.1660 (weekly high), then 1.1690 (moving average cluster) and 1.1740. Support at 1.1580 (near-term floor), then 1.1470 (longer-term static support) and 1.1435 (March low).
Outlook: GBP/USD is testing the 1.3500 level that has capped the pair for the past fortnight; a clean break would open 1.3530-1.3580, but the weak domestic data backdrop argues against sustained gains without a confirmed Iran deal or a hawkish BoE surprise. EUR/USD's hold above 1.1580 is constructive for euro bulls, with the 11 June ECB decision the next structural catalyst.

Today's Calendar:

The US Conference Board confidence print at 15.00 is the most market-sensitive scheduled release today; a miss would reinforce the view that energy-driven inflation is eroding US consumer resilience and could extend the dollar's softness, supporting both GBP/USD and EUR/USD into the close.

Outlook:

The near-term bias across all three pairs is modestly pro-risk (GBP/USD and EUR/USD firmer, dollar softer) so long as Iran deal headlines remain constructive and Brent holds below $100, but the fragility of that narrative - underscored by overnight US strikes on Iranian targets - means the risk of a sharp reversal is live and should not be discounted by treasurers with open USD payables. Structurally, the 11 June ECB decision and 18 June BoE meeting remain the dominant event risks for GBP/EUR positioning: an ECB hike alongside a BoE hold would push GBP/EUR towards 0.87-0.88 quickly, compressing the pair from current levels and representing a meaningful headwind for UK corporates with euro receivables.

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.