Dollar Retreats as Middle East Hopes Hit Bids

Peace hopes hit the dollar hard. The dollar index slips to 97.90, Brent sheds 8%. Euro draws strength from softer oil prices. GBP steady near recent highs as Britain votes. US NFP data arrives tomorrow.

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GBP: Sterling Watches the Ballot

GBPUSD: 1.3623 | EURGBP: 0.8637

Cable pushed higher for a third consecutive session, trading around 1.3600 through Asian hours on Thursday. The daily chart shows an improving bullish trend as the pair rebounds from the lower boundary of its ascending channel, with the technical picture reinforcing what fundamentals are cautiously suggesting.

April's S&P Global Composite and Services PMI both beat consensus at 52.6 and 52.7, pointing to more resilience in the private sector than the broader macro gloom suggests. Sterling absorbed the data solidly.

Investors are currently weighing local election results against fiscal stability. While the pound has climbed nearly 7% since the 2024 general election, the ruling Labour Party faces a litmus test today. A poor showing could trigger whispers of leadership change, potentially unsettling the current fiscal calm. However, the options market currently reflects a serene outlook, but headline risk through today's count is real.

Today's next domestic data point is the April Construction PMI. Last month it printed deep in contraction at 45.6, the soft underbelly of the UK growth picture. Any further deterioration will weigh on sterling. Today’s figures will test whether that sector stabilises or drags further.

Sterling keeps attracting support as UK data continues to beat low expectations, while the dollar loses some of its safe-haven premium.

Volatility around politics, central bank pricing, and geopolitics continues to shape short-term currency swings. Periods of elevated political uncertainty have historically been associated with wider bid-offer spreads and sharper intraday moves in sterling crosses.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3635, 1.3680, 1.3725 and Support sits at 1.3550, 1.3520, 1.3475; Bias: Bullish while above channel support

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8675, 0.8700 and Support sits at 0.8620, 0.8590; Bias: Sterling strength pressures the cross

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EUR: Oil Does the Heavy Lifting for Euro

EURUSD: 1.1760

The euro climbed 0.1% to $1.1760, following a retreat in Brent Crude prices, which slid nearly 8% on headlines about peace talks. Because the Eurozone depends heavily on energy imports, any cooling in oil prices acts as an immediate stimulant for the single currency.

Germany’s factory orders stunned the market this morning, surging 5% MoM, obliterating the 1% consensus. This industrial awakening, combined with the STOXX 600’s 2.2% jump, suggests a shift into a "buy everything" phase. Investors are front-running a positive outcome in the Middle East rather than waiting for signed treaties. The decisive beat landed just as the Eurozone growth narrative could use a credible anchor.

Risk appetite is broadly constructive, though investors note the de-escalation narrative has not yet translated into confirmed shipping reopening or production restarts in the Strait of Hormuz.

Eurozone retail sales figures also arrive today. Consensus sits at 1.0% MoM (prior 1.7%) and -0.3% YoY (prior -0.2%). A miss here could temper some of the overnight optimism.

A recent poll of FX forecasters in May showed the euro forecast to hold around $1.18 in three months, rising to $1.19 at the six-month horizon – a touch higher than the April survey. Forecasters acknowledge the war as a distorting variable but show a clear inclination to look through near-term conflict risk.

A one-page memorandum to resume negotiations over the next thirty days" is progress of a sort, but it is not oil flowing through the Strait. The distinction matters for sustained EUR strength beyond the initial relief trade.

The euro's proximity to 1.18 reflects market optimism. With Eurozone Retail Sales data due today, the divergence between surging industrial orders and consumer spending will dictate whether this rally has the legs to reach the 1.19 forecast by year-end.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1797, 1.1840, 1.1900 and Support sits at 1.1700, 1.1680, 1.1625; Bias: Bullish on softer dollar tone

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USD: War Headlines Run the Show

DXY 98.00

The dollar index (DXY) slipped to 97.90, retreating from last week’s high of 99.09. Hopes for a de-escalation between Iran and the U.S. have sapped the Greenback’s safe-haven appeal, pulling Treasury yields lower as the market pares back aggressive rate hike bets.

The Greenback has largely mirrored the war's swings since hostilities began. It gained approximately 3% in the first month on short-covering and a partial safe-haven bid, but has since surrendered most of those gains. Fed Governor Goolsbee noted that inflation has accelerated since the conflict began, moving further from the Fed's 2% target, complicating both the growth and policy outlook.

St. Louis Fed President Musalem struck a more balanced tone in Mississippi on Thursday. He cited AI demand as a genuine tailwind, acknowledged productivity growth since 2023, and flagged that risks tilt more towards the inflation side than the employment side, keeping the real Fed funds rate at approximately 0.5%. He described it as neutral or mildly accommodative. On the war, Musalem said that firms frequently raised uncertainties around duration and impact, but he stopped short of signalling policy urgency.

The dollar's broader pattern reflects a two-sided story: it softens against European currencies, particularly the Euro and Sterling, as diversification away from dollar-denominated assets picks up, but it holds firmer against major oil-importing currencies in Southeast Asia, where higher crude prices remain a structural headwind.

FX forecasters in the May survey barely shifted their dollar calls from February, before the war began, suggesting a wait-and-see posture rather than a structural rethink.

US initial jobless claims arrive today. Consensus is 205,000 against a prior of 189,000. Investors will also watch the trend in continued claims, especially the four-week average, which previously stood at 207,500. Tomorrow brings NonFarm payrolls, the week's primary event for dollar direction, and a potential read on whether the Fed has reason to revisit its current hold.

Dollar volatility in the current environment has been elevated and episodic, driven by war-related headline flow rather than domestic data alone. Every headline of de-escalation softens its grip, yet every reminder of global uncertainty restores its hand.

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Yen Intervention and Antipodean Resilience

AUDUSD 0.7250 | NZDUSD 0.5963 | USDJPY 156.35 | GBPJPY 212.61

The risk-sensitive Australian dollar inched up to $0.7242, just below the four-year high it touched on Wednesday. With oil lower and risk appetite constructive, the commodity-linked majors are benefiting from the same de-escalation trade that lifted EUR/USD overnight.

Japan's yen stood at 156.15 on Thursday, with dealers on guard after Japan's top currency diplomat, Atsushi Mimura, stated the country faced no restrictions on intervention. Money market data suggests Japan sold approximately $35 billion to support the yen in recent weeks. Three abrupt yen spikes have followed through to Wednesday. US Treasury Secretary Scott Bessent and Japanese Prime Minister Sanae Takaichi are scheduled to meet next week; the Nikkei reports curbing speculative yen selling will feature on the agenda.

Without consecutive BOJ rate hikes to address its behind-the-curve stance, the yen is likely to stay structurally weak in the near term. Repeated verbal and physical interventions raise the probability of broader policy action in the June-July window, a pattern consistent with the late 2024 playbook. Japan's Nikkei returned from holiday and jumped onto the AI-driven equity rally, joining South Korea and Taiwan indices at record highs.

High-beta currencies like the AUD are reaping the rewards of the AI-driven equity rally. However, the yen's "abrupt spikes" serve as a reminder that central bank intervention can reset the board in an instant.

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Current Rate Table:

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Market Lookahead

Thu, 07 May

• Eurozone retail sales (mar)
• US Initial Jobless claims
• UK local elections

Fri, 08 May

• German Industrial production & trade balance (Mar)
• US Unemployment rate, Average hourly earnings, NonFarm Payrolls (Apr)

Sat, 09 May

• China Trade balance and import exports CNY AND USD (Apr)

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