US FX WRAP: Dollar gains on higher energy prices and hot April CPI report; GBP lags amid political uncertainty

USD saw broad-based strength as higher oil prices (due to a lack of US-Iran progress) and a hotter-than-expected CPI report. April CPI was largely higher than expected, with Core M/M accelerating to 0.4% from 0.2%, Headline Inflation Y/Y to 3.8% from 3.3%, while Headline M/M eased to 0.6% from 0.9% as expected. Services and supercore inflation proved sticky, all accelerating M/M with Fed's Goolsbee once again expressing concern over the former, likely foreshadowing the focus from future Fed speeches, namely, concerns shifting back towards inflation as labour growth has shown stabilisation in the last couple of months. Meanwhile, higher US yields on rising oil prices gave USD a boost, as now Iran has set its own preconditions to entertain a second round of talks, some of which the US is reportedly against, i.e. "compensation for damages caused by the war". DXY hit highs of 98.46 before retreating to around 98.27.

GBP underperformed in G10 FX as it digested domestic politics. In brief, PM Starmer told his Cabinet that he intends to remain in leadership and will not schedule an exit – a move which essentially invites a leadership challenge. There are a few key factors that markets will eye, but perhaps most pertinent are: a) Burnham announcing his intention to become an MP, or b) Streeting starting a leadership challenge. Cable now trades at the bottom end of a 1.3500-1.3614 range. Sell-side analysts are broadly in consensus on the dire situation in the UK political landscape; Mohit Kumar of Jefferies suggests that any replacement to Starmer “would likely be left-leaning and be negative for the long end of the curve and the currency”. As such, the bank maintains its short-sterling position.

CAD & NOK outperformed major peers, supported by the backdrop of higher energy prices. Meanwhile, the Yen was subject to a bout of strength in the early European session, but has since come off the 157.308 lows seen at the time. No official confirmation was given behind the move, leaving speculation over intervention/rate check at play. USD/JPY rose back to ~157.60 ahead of APAC trade.