Good morning and happy US inflation day to all who celebrate. The dollar is advancing and Treasury yields are edging higher in the run-up to the week’s most important data release at 8:30, which is expected to show prices rising 3.7% in the year to April—the fastest rate since 2023. Most major currencies—including the euro, Swiss franc, Canadian dollar, Japanese yen, Australian dollar, and New Zealand dollar—are down roughly a third of a percent against the greenback from yesterday’s close.

Oil prices are on the ascent once again after President Trump called the latest Iranian peace proposal “garbage” and said last month’s ceasefire was on “massive life support,” raising the risk that the conflict in the Middle East could resume within days. Brent crude is trading at $107 a barrel and West Texas Intermediate at $101, both up more than 3.5% from yesterday’s session. Traffic through the Strait of Hormuz remains at an effective standstill, reducing global energy supplies by roughly a fifth relative to pre-war levels, while prediction markets are placing just one-in-three odds on a full reopening by the end of June.

British borrowing costs are climbing and the pound is coming under selling pressure as calls for Keir Starmer to step down grow more intense. More than 80 Labour lawmakers—including a number of parliamentary secretaries—have urged the prime minister to resign or set out plans for his departure following the party’s disastrous local election results, and investors are pricing in the risk that potential successors such as Angela Rayner or Andy Burnham could pursue a more expansionary fiscal agenda. Ten-year gilt yields have surpassed their highest levels since 2008, while thirty-year instruments—arguably the purest measure of perceived creditworthiness—are approaching levels last seen in 1998.

The euro may not be far behind. Chancellor Friedrich Merz, elected on a promise to revive the German economy through infrastructure investment, deregulation, and higher defence spending, is grappling with historically low approval ratings—polls show more than 80% of citizens dissatisfied with his leadership—while the far-right Alternative for Germany now leads his party by at least five points. With the governing coalition fracturing and major political hurdles ahead, the reform agenda is stalling, eroding fiscal tailwinds and dimming the country’s growth prospects—unwinding some of the optimism priced into bloc-wide markets last year. After repeatedly failing to sustainably breach the $1.18 level in the last few months, option market skews are again pointing to downside risk in the common currency.

Region-specific factors are playing a relatively minor role in currency market dynamics, however. Bond yields are rising in broadly synchronised fashion across the major advanced economies as investors resign themselves to a prolonged disruption in global energy supplies, meaning cross-currency rate differentials are not shifting as dramatically as the headlines alone might suggest. Speculative positioning remains restrained and implied volatility subdued, with most traders avoiding large directional bets while the White House retains control of the narrative. Absent a genuine breakthrough in the Middle East, this low-conviction, range-bound environment looks set to persist.