UK GDP beats on a busy Super Thursday

Super Thursday delivered more than expected. UK GDP topped forecasts in Q1, manufacturing bounced, but sterling stayed under pressure as politics and a widening trade gap took the shine off. Meanwhile the dollar advanced on surging US inflation, a new Fed chair landed, and Trump and Xi sat down amid an unresolved Iran conflict.

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GBP Feels the Weight of Politics and Debt

GBPUSD 1.3506 | EURGBP 0.8667

The GBP/USD pair traded at 1.3506, on course for a weekly decline of around 0.8%. Political turbulence drove part of that drift, with Prime Minister Keir Starmer under sustained pressure following one of Labour's worst results in last week's local and regional elections. He has so far declined to resign, but the noise is keeping a lid on sterling sentiment.

UK GDP surprised everyone with a 0.3% monthly expansion for March, beating the grim -0.2% forecast. Manufacturing production jumped 1.2% MoM in March v/s expectations of −0.2%. Industrial production fell 0.2% on the month, though that was fractionally better than the −0.3% forecast and the non-EU trade deficit widened to £15.195 billion in March, from a prior reading of −£10.944bn, a notable deterioration tied in part to the disruption from the Iran conflict that erupted at the end of February. The data picture is genuinely mixed. Growth and manufacturing came in ahead of forecasts. The trade position, on the other hand, points to structural pressures unlikely to ease quickly.

The Bank of England (BoE) faces a tangled web. (European Central Bank) ECB’s Catherine Mann warns that the MPC must watch UK debt levels like a hawk, even as growth numbers offer a degree of relief. Resilience in the face of the Iran war suggests underlying strength, but political instability creates a ceiling. We see a fundamental tug-of-war between strong domestic data and the risk of a leadership vacuum if calls for Keir Starmer’s resignation intensify.

The EUR/GBP pair held at 0.8667. With both the UK and eurozone navigating their own structural headwinds, that cross rate reflects something close to a stalemate.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3600, 1.3655 and Support sits at 1.3480, 1.3420

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8700, 0.8735 and Support sits at 0.8620, 0.8585

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EUR: Euro Rests Flat Under ECB Judgment Calls

EUR/USD 1.1712

The EUR/USD pair traded at 1.1712, little changed on the session but on track to lose around 0.6% for the week, its steepest weekly decline in two months. The euro is drifting, weighed down by dollar strength rather than any fresh European catalyst.

ECB Chief Economist Philip Lane set the tone at a Centre for European Reform address. He described conducting monetary policy under complex conditions as a judgment call, argued that the appropriate response to cost-of-living shocks is non-linear, and confirmed that interest rate decisions will be grounded in the ECB's ongoing inflation assessment and surrounding risks. He pushed for a meeting-by-meeting, data-dependent approach, a framework that deliberately avoids forward guidance and keeps optionality in place. Lane also flagged communication risk: a material deviation in inflation that goes without a policy response undermines credibility.

Lane's framing keeps the ECB deliberately vague,which is precisely the point. With the global inflation picture shifting and the geopolitical landscape unsettled, the ECB is protecting its flexibility. That stance gives EUR/USD little upside catalyst for now, particularly with the dollar drawing energy from higher US yields and a rising probability of Federal Reserve (Fed) rate hikes later this year.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1765, 1.1800 and Support sits at 1.1660, 1.1605

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USD: Warsh and the High-Stakes Summit

DXY 98.49 | USDCNY 6.78

The DXY Index sat at 98.49, and the dollar posted a weekly gain, driven by a combination of strong inflation data and the confirmation of Kevin Warsh as the new Fed Chair, with Jerome Powell's tenure ending Friday. "The inflation data we received this week certainly won't be welcomed by FOMC officials, including incoming Fed Chair Kevin Warsh."

US Producer Price Index (PPI) data on Wednesday showed the biggest monthly increase in four years in April. That followed Tuesday's Consumer Price Index (CPI) figures, which showed another solid monthly rise, pushing the annual inflation rate to its fastest pace in three years. The CME FedWatch Tool put the probability of a Fed rate hike in December at 31.8%, up from just over 16% a week earlier. Markets are now anticipating the FOMC will begin a tightening cycle in December, with three hikes currently projected for the cycle.

Longer-dated US Treasury yields climbed to their highest levels since mid-2024 overnight. Elevated yields supported the dollar across the board. Boston Fed President Collins acknowledged the heightened uncertainty, called for a "healthy dose of humility," and confirmed the Fed is "exercising deliberate patience," holding to current policy while data develops. She noted considerable volatility in indicators and flagged the difficulty of isolating AI's impact on the economy.

The Trump-Xi summit added another layer of complexity. Xi told Trump that trade talks were progressing but warned that disagreements over Taiwan could send relations down a dangerous path. Trump described Xi as a great leader and framed the meeting as potentially "the biggest summit ever." The two are set to cover the fragile trade truce, the Iran conflict, and US arms sales to Taiwan over two days.

China's onshore yuan touched a three-year high of 6.7840 per dollar, while the offshore rate reached 6.7817. The yuan is expected to hold broadly steady in the near term, which could ease the path of US-China discussions. That said, pushback via official fixings and intervention signals limited official tolerance for rapid appreciation.

Oil prices hold above pre-conflict levels, reinforcing global inflation concerns. Markets are trying to run two playbooks at once: AI and earnings say buy growth, but geopolitics and energy prices are quietly rewriting the inflation trajectory in the background.

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The Wider Realm: Yen, Aussie, and the AI Engine

USDJPY 157.70 | GBPJPY 213.59 | AUDUSD 0.7238 | NZDUSD 0.5944

The Aussie pushes four-year highs, last trading at 0.7256. Domestically, hawkish rate expectations continued to underpin the Australian dollar. NZD/USD eased 0.06% to 0.5931, a modest retreat with little fresh catalyst.

USD/JPY reversed early session gains to trade around 157.87, with the yen drawing support from comments by Bank of Japan (BoJ) board member Kazuyuki Masu. Masu stated that the BOJ should promptly raise interest rates in the absence of clear signs of an economic slowdown, a notably direct stance. GBP/JPY held at 213.50.

The AI-led equity rally continued to chug along, with investors for now brushing aside the prospect of rates staying higher for longer, oil above $100 a barrel, and the unresolved Iran conflict. The disconnect between equity optimism and macroeconomic pressures has begun to define this phase of currency trading. Whether that resilience can be sustained against a backdrop of genuine macro re-pricing is the question the coming sessions will answer.

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Current Rate Table:

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Market Lookahead

Thu, 14 May

• US Retail Sales

Fri, 15 May

• German Industrial production (Mar)

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