The below key drivers are likely to impact investor risk sentiment and FX markets in May:

• The ongoing US/Iran conflict’s impact on oil prices continues to drive demand for the US dollar while increasing pressure on inflation-sensitive currencies.
• Markets are focused on central bank outlooks and interest rate expectations as policies diverge for countries looking to control inflation.

EUR | Euro

The euro has been volatile as tensions in the Middle East pushed oil prices higher, but easing fears helped the euro recover. Rising inflation could also pressure the ECB to raise interest rates.

The euro has seen strong volatility over recent weeks as the conflict in the Middle East drove oil prices sharply higher and boosted demand for the US dollar as a safe haven.

EURUSD began April around US$1.15 as the impact on rising energy costs hit the pair. As the month progressed, sentiment improved as US President Donald Trump signalled potential US and Iran talks to ease the conflict, and by extension, stabilise oil markets. As the price of oil has fallen, EURUSD has pushed higher and with the pair recently trading back up near US$1.18. Should we hopefully see an end to the conflict sooner rather than later then a move to US$1.20 could be on the cards however we have seen many deadlines come and go and the standoff in the Strait of Hormuz where 20% of the world’s oil and gas pass still remains.

Latest data showed that inflation in the Eurozone had pushed up to 3%, and should this continue to be forced higher by events in the Middle East, then the European Central Bank may be forced into raising rates as soon its June policy decision.

Looking ahead, the euro is likely to remain heavily influenced by the US/Iran conflict, and ongoing tensions in the Middle East. Investors will likely be closely monitoring economic data like the Eurozone Purchasing Managers Index (PMI) and US Retail sales for any clues to economic health and central bank direction.

Expected ranges:

• EURUSD 1.1510–1.1880
• EURGBP 0.8610–0.8780

GBP | Sterling

The value of the pound has primarily been impacted by events in the Middle East, which has caused some big swings in GBPUSD throughout April and May.

In early April, GBPUSD fell to around US$1.3190 as concerns grew that surging oil and gas prices could weigh heavily on the UK economy and push inflation higher. Despite the ongoing conflict, there has been optimism that it could be nearing a diplomatic end, helping GBPUSD to rally, beginning May back above US$1.36.

With the rising price of energy, the Bank of England may look to hike interest rates later in the year, should inflation rise again. These expectations have added support to the pound over recent weeks along with some better-than-expected UK data including strong growth data and Services sector Purchasing Manager’s Index (PMI).

Looking ahead, the Middle Eastern conflict will likely be a driver of the pound’s value. Additionally, growing uncertainty over Keir Starmer’s position as Prime Minister could also lead to some pound softness. Labour’s poor results at recent local elections and ongoing criticism about the appointment of Peter Mandelson as US Ambassador has led to growing calls for the Prime Minister to resign. Should the Prime Minister’s position become untenable, it could soften the GBPUSD back down towards US$1.30.

Expected ranges:

• GBPUSD 1.3385–1.3800
• GBPEUR 1.1390–1.1615

USD | United States dollar

The US dollar softened as inflation eased and the job market slowed, but ongoing global uncertainty and cautious signals from the Federal Reserve continued to support demand for the currency.

The US dollar has traded with a softer tone over the past week as investors reassessed the Federal Reserve’s policy path following a run of more benign inflation data and signs that labour market momentum is gradually cooling.

Recent Consumer Price Index (CPI) and Producer Price Index (PPI) figures suggested underlying price pressures are easing, while softer payroll revisions and weaker job openings data reinforced the narrative that restrictive monetary policy is beginning to weigh on growth. Federal Reserve officials have maintained a cautious stance, however, emphasising that inflation remains above target and that rate cuts will likely depend on sustained evidence of disinflation. Chair Jerome Powell has continued to signal patience rather than urgency, which has prevented markets from aggressively pricing deep easing. Treasury yields have drifted lower as a result, removing some of the dollar’s rate advantage. At the same time, geopolitical uncertainty and weaker global growth continue to provide periodic safe -haven demand.

Looking ahead, markets are expected to monitor upcoming inflation, retail sales and labour market releases for confirmation that the Fed can begin easing later this year. Until then, the dollar may remain rangebound, caught between declining yields and lingering demand for defensive assets.

Expected ranges:

• DXY 97.625–99.093

JPY | Japanese yen

The Japanese yen stayed volatile as policy differences, global tensions, and energy costs weighed on it. Brief government action and warnings sparked a sharp rebound, but pressure on the yen remains.

The Japanese yen had a volatile April, trading around the 160 level as monetary policy divergence and intervention risks dominated sentiment.

Ongoing US/Iran conflict and continuing geopolitical tensions in the Middle East, added to oil price swings and bouts of US dollar strength, while Japan’s heavy reliance on energy imports kept underlying pressure on the currency. Meanwhile, Bank of Japan (BoJ) Governor, Kazuo Ueda, maintained a cautious stance despite expectations of a potential rate hike. Toward month end, signs of possible government intervention and verbal warning from officials drove a sharp rally for the yen. It was the yen’s biggest rally in three years, briefly lifting it from a low of 155.57, not seen for almost four-decades, before stabilising in the 156.50 range.

Japan’s economic data sent mixed signals. While trade remained in surplus on strong exports, services activity weakened and labour data softened slightly. Traders remain on alert as officials continue to signal readiness to act, pointing to a more managed approach to the yen.

Ongoing policy divergence between the BoJ and the Federal Reserve is likely to sustain volatility, suggesting that lasting strength may require repeated intervention. Without a more decisive shift in policy or relief from external pressures, the yen is likely to remain under pressure, with intervention serving as a temporary buffer rather than a lasting solution.

Expected ranges:

• USDJPY 150—165

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