May the Fourth Be With FX: Project Freedom Begins

Trump launches “Project Freedom” to free ~900 ships stranded in the Strait of Hormuz. Hormuz headlines steady oil and holds FX in tight ranges. Sterling edges up, euro flat, dollar slips. Yen jolts traders, intervention risk in play. Energy costs, central bank signals and a busy US data calendar all in focus this week.

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GBP: The Sterling Strait Watch

GBPUSD: 1.3587 | EURGBP: 0.8631

The pound trades near $1.3587, edging higher against a softer dollar, while EURGBP settles close to 0.8631. Early flows were shaped by news of the US launching Project Freedom to free roughly 900 ships trapped in the Strait of Hormuz. Neutral parties seek safe passage past Iranian borders. Investors are tracking this humanitarian effort closely as geopolitical tensions drive energy prices. Brent Crude holds at $108.36 per barrel.

Meanwhile, the upcoming UK local elections add domestic uncertainty, with Thursday's vote likely to hand Labour Party heavy losses, while sterling's upside remains limited.

Structural friction centers on inflation risks. Bank of England (BoE) Governor Andrew Bailey emphasises that severe price pressures dictate policy. Geopolitical conflict pushes a tightening cycle. Higher energy costs are reflected in consumer price indices. Bailey signals that more Monetary Policy Committee (MPC) members now favour a rate hike this June. Higher rates protect sterling for the moment. However, domestic political friction limits any sustained gains. Some analysts suggest that central banks are likely to act when supply shocks strike.

Markets now price in 63 basis points of BoE hikes, up from near-zero recently, making the rate path more active. Every Brent barrel above $100 now shapes policy discussions.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3650 and Support sits at 1.3520

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8680 and Support sits at 0.8580

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EUR: ECB Hawkishness Builds, but Merz Plays It Cool

EURUSD 1.1730

The euro trades flat at $1.1730. German Chancellor Friedrich Merz stepped in to downplay a fresh rift with Washington after Trump confirmed plans to raise tariffs on EU vehicles to 25%, forcing Berlin to open channels with the European Commission and Washington to manage this risk. Equity futures showed slight strength, while the greenback moved in a narrow range.

The ECB picture, though, is doing the heavy lifting. The European Central Bank (ECB) presents its 2025 Annual Report today. ECB President Christine Lagarde and board member Piero Cipollone attend the Eurogroup meeting in Brussels to discuss regional stability and to address the widening gap between growth and policy requirements. The structural reality involves a tug-of-war: the need for growth support against the reality of tariff-induced inflation. Merz seeks to align German industrial interests with US trade demands, but the path forward would require delicate diplomacy.

Markets are pricing in 76 basis points of ECB hikes. Car tariffs directly threaten core European manufacturing. This friction limits the euro's upward momentum against its major counterparts. Investors are cautiously monitoring the dialogue between Berlin and Washington for signals on euro stability. The tension between fiscal policy and trade reality creates a wideband for price action. Any shift in ECB tone or US trade rhetoric could move the EURUSD pair quickly.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1800 and Support sits at 1.1650

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USD: Data Flows and Capital Capex

DXY 98.12

The dollar index (DXY) eased down to 98.04, then traded near 98.12. The Federal Reserve (Fed) held rates last week, but three FOMC members dissented against any easing bias, and markets heard that clearly. Fed funds futures now price just 2 basis points of cuts by year-end, down sharply from 11bps a week ago, a stark contrast to previous expectations.

Investors’ focus has shifted from rate discussions to critical US data releases this week. Friday brings the April payrolls report. The median forecast sits at 60,000 jobs, a steep drop from March's 178,000. Seasonal adjustment issues widen the range anywhere between -15,000 and +135,000, making the number almost impossible to trade cleanly ahead of time. Before that, US trade figures, ISM services, JOLTS, jobless claims, and ADP employment all feed into the picture throughout the week.

Fed NY President John Williams speaks today, likely offering a map through this data fog. The structural risk involves a cooling labour force vs. sticky inflation, a combination that keeps the Fed in a hawkish posture.

AI capital expenditure data also drew attention; the total 2026 AI capex now stands at $751 billion, $80 billion above the estimates that opened earnings season and 83% above 2025 spending. The size of that number is feeding bond yield pressure, which is creating a quiet headwind for equity valuations.

Stronger data is likely to keep the greenback resilient against most currencies, while any data surprises could trigger immediate adjustments across all currencies. The shift in Fed expectations indicates that the era of easy money draws to a close, and interest rate differentials will likely drive capital flows for the foreseeable future.

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Yen Swings and Aussie Gains on Interest Shifts

AUDUSD 0.7214 | NZDUSD 0.5922 | USDJPY 156.74 | GBPJPY 212.95

The Aussie dollar advanced 0.2% to $0.7214. The Reserve Bank of Australia (RBA) announces its next policy decision on Tuesday, with the majority of analysts forecasting a hike to 4.35%, which would make it a third consecutive increase. Australia's two largest grocers flagged rising price pressures last week, pointing directly to the impact of the Iran war on fuel and raw material costs. The rate path supports the Aussie dollar as Australia battles stubborn inflation alongside a live RBA mandate. The Kiwi dollar outpaced its antipodean counterpart, up 0.5% to $0.5922. No specific catalyst today beyond broad dollar softness, the NZDUSD pair is riding the risk tone and AUD sympathy.

The yen is where the session gets theatrical. The dollar fell as much as 0.9% to 155.7 yen during a nine-minute window around midday Singapore time before paring losses. Traders are watching for a repeat of last week's suspected Ministry of Finance intervention, an operation analysts estimate at around $35 billion. MoF officials did not respond to requests for comment . With Japan observing the Golden Week holiday, liquidity runs thin, making the currency vulnerable to sudden spikes. The fundamental backdrop still favours dollar strength against the yen, but the MoF is clearly willing to act. The key question is whether the US joins Japan in supporting the yen. That would be a different conversation entirely.

Commodity dependency drives the antipodean pairs. When energy costs spike due to conflict, the Aussie and Kiwi feel the heat. Conversely, the yen acts as a barometer for central bank intervention risk.

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Current Rate Table:

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Market Lookahead

Tue, 05 May

• RBA Interest rate decision
• US JOLTS job openings , US ISM Services PMI (Apr)

Wed, 06 May

• Eurozone and Germany HCOB Composite and Services PMI (Apr)
• Eurozone Producer Price Index (Apr)

Thu, 07 May

• Germany factory orders (mar)
• Eurozone retail sales (mar)
• US Initial Jobless claims

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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