Forex week in review 20/2026: hot US inflation and a sterling sell-off

The week of 11–15 May was about one word: inflation. US consumer and producer price data both came in hotter than forecast, and the market rewrote its view of the Federal Reserve within two sessions. A few months ago the debate was how many times the Fed would cut in 2026. By Friday, traders were putting meaningful odds on a hike. The dollar did what a currency does when its interest-rate outlook moves up relative to everyone else's: it rallied against every major.

Layered on top was a sharp political sell-off in the UK and an oil price that refused to come down while the Strait of Hormuz stayed effectively closed. Put together, it was the dollar's best week in about two months and sterling's worst in a long while.

The backdrop going into the week

To understand why inflation numbers carried so much weight, you need the context. According to The National, oil prices have been elevated since the war involving Iran began on 28 February, when Tehran effectively blocked the Strait of Hormuz, the route for more than 20% of global crude and LNG supply. A ceasefire has formally been in place since early April, but there has been little progress toward a lasting agreement and a US naval blockade of Iranian ports remains in force.

An energy shock of that size works its way into everything: fuel, transport, electricity, fertiliser, airfares. The question for central banks is whether it is a one-off jump in the price level (which they would usually look through) or the start of something that feeds into wages and expectations (which they would have to fight). This week's US data pushed the market toward the second interpretation.

On the Fed side, the target range for the federal funds rate stood at 3.50–3.75%. The Senate confirmed Kevin Warsh as the next Fed chair on Wednesday 13 May, to succeed Jerome Powell, adding a layer of uncertainty about how the committee would respond to the inflation pulse.

Day by day

Monday 11 May: a quiet start, a loud gilt market

The Dollar Index (DXY) made its low for the week on Monday at 97.85, according to RTTNews. The early action was in the UK, where calls for Keir Starmer to step down grew after Labour's heavy losses in the local elections earlier in May. Long-dated gilt yields rose as investors began to price the risk that a successor might favour looser fiscal policy.

Tuesday 12 May: US CPI beats on headline and core

The Bureau of Labor Statistics released April CPI at 8:30am New York time. According to RTTNews, headline inflation rose to 3.8% year on year from 3.3% in March, against 3.7% expected. Core CPI, which strips out food and energy, rose to 2.8% from 2.6% against 2.7% expected. The monthly numbers were the bigger problem: headline up 0.6% and core up 0.4% against 0.3% expected.

A 0.1 percentage point beat on core sounds small. It is not, because markets trade the surprise, not the level. Core is what central banks watch to judge whether energy is spilling into the broader economy, and a 0.4% monthly core print annualises to roughly 5%. If you want the mechanics of why a small surprise moves a currency, our guide on how economic data moves forex walks through consensus, actual and the reaction function.

The same day, Japan's Finance Minister Satsuki Katayama met US Treasury Secretary Scott Bessent, according to Adnkronos. After the meeting she said the two countries cooperate closely, which some read as a sign that Tokyo had Washington's understanding for its recent currency operations.

Wednesday 13 May: PPI confirms the pipeline is hot

If CPI opened the door, producer prices pushed the market through it. RTTNews reported April PPI up 6% year on year against 4.9% expected, after an upwardly revised 4.3%. The monthly rise was 1.4% against 0.5% expected, and core PPI rose 1% on the month against 0.3%. Producer prices measure what businesses pay and charge further up the supply chain, so a jump of this size tells you more cost pressure is in the pipeline for consumer prices in the months ahead. Trading Economics described it as the fastest wholesale inflation since 2022.

Thursday 14 May: UK GDP beats, then politics takes over

UK first-quarter GDP rose 0.6% on the quarter, according to the Office for National Statistics, the strongest growth in a year, with March alone up 0.3%. On a normal day that would support sterling. It did not get the chance. Greater Manchester Mayor Andy Burnham said he would seek to return to Parliament through a by-election in Makerfield, after the local MP offered to step aside. Under Labour rules a leadership challenger must be an MP and win nominations from 20% of Labour MPs, so markets read it as the first concrete step toward a challenge to Starmer.

According to JBizNews, sterling fell nearly 1% against the dollar that day, its largest one-day drop in more than three months, and was the worst-performing G10 currency. Longer-dated gilts underperformed as the yield curve steepened.

In the US, April retail sales rose 0.5%, in line with consensus, and initial jobless claims came in at 211,000, according to FXStreet. Neither changed the picture. In Beijing, President Trump and President Xi Jinping held talks, and the two leaders reportedly discussed reopening the Strait of Hormuz.

Friday 15 May: risk-off into the weekend

Friday had the feel of a market de-risking before the weekend. Brent crude settled at $109.26 a barrel, up 3.35% on the day and nearly 8% on the week, according to The National, while WTI closed at $105.42, up 10.5% for the week. The S&P 500 fell 1.24% on the day, the FTSE 100 1.7% and the DAX more than 2%. Gold fell sharply. The US 10-year Treasury yield traded above 4.5%, its highest in nearly a year, according to FXStreet.

The Dollar Index hit its weekly high of 99.32 on Friday and closed at 99.28, up 1.41% on the week from 97.90.

Pair by pair

EUR/USD: 1.1786 to 1.1626 (−1.36%)

The euro had no domestic crisis of its own; this was almost entirely a dollar story. EUR/USD traded a range of 1.1617–1.1792 and closed near the lows, its weakest level since early April. The mechanism is the interest-rate differential. When two-year and ten-year US yields rise faster than European yields, holding dollars pays relatively more, and capital flows follow. The euro area is also a large energy importer, so a higher oil price worsens its trade balance at the same time. Both forces pushed in the same direction.

GBP/USD: 1.3634 to 1.3325 (−2.27%)

Sterling was the week's weakest major. The range was 1.3314–1.3655 and the pair closed within about 11 pips of the low. Here two separate stories stacked on top of each other: the broad dollar rally, and a UK-specific political risk premium. According to deVere Group, 10-year gilt yields rose to 5.13% during the week, their highest since 2008.

Normally, higher yields attract capital and support a currency. That is the textbook relationship covered in our central banks and interest rates guide. When yields rise because investors are demanding more compensation for fiscal or political risk, the relationship breaks: the currency and the bonds fall together. That is exactly what happened in the 2022 mini-budget episode, and it is what traders were nervous about this week. Rising yields with a falling currency is a warning sign, not a buying signal.

USD/JPY: 156.67 to 158.77 (+1.34%)

The yen weakened for a familiar reason: the gap between US and Japanese interest rates widened again as US yields jumped. The range was 156.45–158.86. According to FXStreet, by Thursday the pair was near its highest since Japan intervened in the currency market on 30 April. Japan's Finance Ministry later confirmed it had spent a record amount on intervention between late April and late May. Japan also imports almost all its oil, so the energy shock hurts its trade balance, which adds to pressure on the yen.

For traders this creates an asymmetric risk. The trend is up, but the closer the pair gets to the levels where the authorities acted before, the higher the chance of a sudden multi-yen drop. On 30 April the dollar fell from about 160 yen to about 155 in a single evening, according to Adnkronos. A move like that blows through stop-losses and creates slippage for anyone caught on the wrong side.

AUD/USD: 0.7247 to 0.7151 (−1.32%)

The Australian dollar had been the strongest G10 currency of the year, helped by a Reserve Bank of Australia that has been raising rates. This week it gave some back. The range was 0.7139–0.7272. The Aussie is a risk-sensitive currency: it tends to fall when equities sell off, as they did on Friday, and when the dollar is strong across the board.

XAU/USD: 4,714.89 to 4,540.07 (−3.71%)

Gold is often described as a safe haven, and with a war in the Middle East you might have expected it to rise. It fell, and FXEmpire called it gold's worst week of the year. The reason is that gold pays no interest. When markets price higher rates and Treasury yields jump, the opportunity cost of holding a non-yielding asset rises, and a stronger dollar makes gold more expensive for buyers using other currencies. This week those two forces were stronger than any safe-haven bid.

Why the dollar rallied when the news was "bad"

One of the most confusing things for newer traders is that the same type of news can push a currency in opposite directions depending on the regime. Higher inflation is bad for an economy. So why does the currency go up?

Because in the short run, FX trades on expected interest rates. If inflation runs hot, the market expects the central bank to keep rates higher for longer or raise them. Higher expected rates mean higher yields on that currency's deposits and bonds, which attracts capital. That is why the dollar rallied on a CPI beat. RTTNews reported that CME FedWatch odds of the Fed's range rising to 3.75–4.00% by year-end rose from 21.5% to 39.1% over the week, while the odds of any cut by year-end fell to 0.6%.

The exception is when inflation is so bad that markets start to doubt the central bank's credibility, or when higher yields reflect fear about public finances rather than tighter policy. The UK this week was a partial example of the second case.

There was also a safe-haven element. RTTNews attributed part of the dollar's strength to the Middle East conflict drifting further from a diplomatic resolution. When uncertainty rises, global investors tend to hold more dollars because US Treasuries are the deepest and most liquid market in the world.

The risk side: what a week like this does to a leveraged account

Weeks with a clean directional move look easy in hindsight. They are not easy in real time, and leverage makes them dangerous.

Worked example (illustrative): a trader in the EU buys one standard lot of GBP/USD at 1.3634 on Monday, expecting the previous week's strength to resume. One standard lot is 100,000 pounds, worth about $136,340, and at the ESMA retail limit of 30:1 the required margin is about $4,545. Each pip is worth $10. By Friday's close at 1.3325, the position is down 309 pips, a loss of $3,090. On a $5,000 account, that is 62% of the balance gone in five days, and the account would likely have hit its margin call and stop-out levels before Friday.

The same 309-pip move with a position sized so that a 50-pip stop risked 1% of the account would have been a small, survivable loss. That is the whole argument of position sizing: the market decides the move, you decide what it costs you. Remember too that most retail CFD accounts lose money; brokers' own disclosures typically show between roughly 61% and 89% of retail accounts losing, and ESMA found 74–89% in its 2018 review. Our guide on leverage and margin explains why.

What this week teaches

• Markets trade the surprise, not the number. CPI at 3.8% would have been a non-event if 3.8% had been the forecast. The 0.1 point beats on headline and core, and the much bigger beat on PPI, changed the expected rate path. Use an economic calendar that shows the consensus, and know it before the release.
• Rate expectations drive currencies more than growth headlines. UK GDP beat expectations on Thursday and sterling still fell, because politics and fiscal risk mattered more than one quarter's growth.
• Watch whether yields and the currency move together. Rising yields with a rising currency means the market expects tighter policy. Rising yields with a falling currency means investors want a risk premium. Sterling showed the second pattern this week.
• Gold is not a one-way safe haven. When the driver is higher real interest rates, gold can fall even during a war.
• Intervention zones are real risk. USD/JPY trends toward a level where the authorities have already acted once. Trend-followers there are exposed to sudden gaps.

How the week fits the bigger picture

This was the week the inflation consequences of the Hormuz closure moved from forecasts into hard data. That shift matters for every pair, because it changes the relative path of interest rates. The US is a net energy exporter; the euro area, the UK and Japan are importers. An oil shock tends to hurt importers' trade balances and growth more, while the inflation it creates pushes the Fed toward tighter policy. That combination has historically been supportive of the dollar, and this week fitted the pattern.

It also set up the next phase. The Federal Reserve minutes due on Wednesday 20 May would show how worried policymakers were at their late-April meeting, before these numbers. The UK's April inflation print the same day would test whether the BoE's response would be as hawkish as markets had started to price; according to Invezz, traders now expect at least two Bank of England hikes in 2026, compared with roughly two cuts expected before the conflict escalated.

For context on how the market looked a week earlier, see last week's recap. The story continues in the following week's review.

Scheduled next week (18–22 May)

These are the main scheduled events. They are listed so you know when volatility and wider spreads are likely; they say nothing about direction.

• Tuesday 19 May: Japan first-quarter GDP (preliminary).
• Wednesday 20 May: UK April CPI from the ONS; minutes of the Fed's 28–29 April FOMC meeting; Nvidia quarterly results after the US close.
• Thursday 21 May: Flash PMIs for May from the euro area, UK and US; Australia's April labour force survey.
• Friday 22 May: Canada retail sales; University of Michigan consumer sentiment and inflation expectations for May.
• All week: Headlines on US–Iran negotiations and the status of the Strait of Hormuz; UK political developments around the Labour leadership.

Sources

• RTTNews: weekly dollar review for the week ended 15 May 2026
• FXStreet via TMGM: Forex Today, US Dollar extends rally on hawkish Fed repricing (15 May 2026)
• Trading Economics: Dollar set for strong weekly advance (15 May 2026)
• The National: Oil headed for weekly gain as Hormuz disruptions continue (15 May 2026)
• JBizNews: Sterling falls as Burnham sets up leadership showdown (15 May 2026)
• Financial Investigator / deVere Group: Burnham return rattles gilt markets (15 May 2026)
• Daily Sabah: UK economy expands 0.6% in Q1 (14 May 2026)
• Invezz: Pound steadies as UK politics and inflation cloud outlook (18 May 2026)
• ABA Banking Journal: Warsh sworn in as Federal Reserve chair
• Adnkronos: Japan spends record 11.7 trillion yen in April–May interventions
• US Bureau of Labor Statistics: May 2026 release schedule
• StatMuse: daily gold prices, May 2026
• FXEmpire: gold weekly review (17 May 2026)