Politics undermines the pound’s power

• Labour’s defeat in local elections risks dragging down GBPUSD.
• Slowing inflation in Tokyo reduces the chances of the BoJ tightening monetary policy.

EURUSD managed to stay afloat, rebounding from its 50-day moving average. This was helped by the fact that the chances of the Fed cutting interest rates in June rose above 50% again. Not least, the single currency was helped by reports that the European Central Bank had reduced its holdings of US assets from $51.9 billion to $50.9 billion and increased its holdings of Japanese assets. As a result, the share of the greenback in reserves fell from 83% to 78%, partly due to changes in its exchange rate.

The diversification of gold and foreign exchange reserves by central banks has become one of the key factors behind gold’s rapid rally in 2024–2025. If regulators exchange dollars not only for precious metals but also for other currencies amid uncertainty over Trump’s policies, the dollar will have a difficult time. According to more than 70% of investors participating in the MLIV Pulse survey, the US dollar will fall after the end of next month.

However, the greenback is not ready to give up yet. It is benefiting from the Fed’s prolonged pause in its rate-cutting cycle. At the same time, yields on dollar-denominated assets remain high, while competing currencies remain vulnerable. For the first time since October 2024, core inflation in Tokyo fell to 1.8%, below the Bank of Japan’s target. This statistic is seen as a leading indicator of national inflation and could deprive USDJPY bears of an important trump card, as it undermines arguments for further rate hikes to normalise policy.

The British Labour Party faces a severe test due to elections in Gorton, Denton and Greater Manchester. Polls show that the populist Reform UK and the Greens will squeeze the ruling party and bring Keir Starmer closer to resigning as prime minister. Rising political risks and expectations of a Bank of England rate cut as early as March are putting pressure on GBPUSD.

Interestingly, gold is not rushing to take advantage of the weakness in the world’s major currencies. The precious metal is closely monitoring the progress of negotiations between Washington and Tehran, which were postponed until next week. At the same time, American officials appeared dissatisfied, while Iranian officials spoke of significant progress. A diplomatic failure would lead to armed conflict in the Middle East and increase demand for safe-haven assets, primarily gold.

The FxPro Analyst Team