Economic Update

18 May 2026

UK politics waits, data takes centre stage

UK political discourse continues to circle a potential leadership contest, although no candidate has yet challenged the PM. Recent commentary from Wes Streeting and Andy Burnham focused on closer UK–EU alignment, though not without internal criticism from senior figures including Lisa Nandy. For now, this remains positioning rather than progression.

Attention is likely to shift to the pending Manchester by-election, expected on either 18 or 25 June, depending on parliamentary procedure this week.

Near-term direction for GBP may depend less on politics and more on a dense run of economic data. The week includes:

• Labour market data (Tue)

• CPI, RPI and PPI inflation releases (Wed)

• Flash PMIs (Thu)

• Retail sales, consumer confidence and public finances (Fri)

Recent sterling weakness reflects political uncertainty. Stronger inflation data could increase rate hikes risks and strengthen the GBP in the short-term, although risks appear skewed to softer outcomes in areas such as retail sales and consumer confidence. 

Energy markets respond to entrenched geopolitical positions

Negotiations between the US and Iran appear to have stalled, with both sides maintaining existing positions. At the same time, regional tensions persist, including continued exchanges involving Israel and Hezbollah alongside missile and drone launches from Iran towards Gulf states.

Economic consequences have begun to emerge, with weaker Israeli growth in Q1 offering one indication of broader regional strain.

Markets have responded accordingly. A prolonged impasse, or escalation, would typically lead to:

• Higher oil and gas prices

• A firmer US dollar, reflecting demand for defensive assets

Price action at the start of the week suggests energy markets are already adjusting to these risks.

European outlook remains constrained

Flash PMI releases for May are expected to provide an updated view on activity across the euro area. Surveys may show continued moderation in both manufacturing and services, reflecting the combined pressure of elevated energy costs and external uncertainty.

However, the European Commission’s latest growth and inflation forecasts could carry greater weight. Current expectations point to:

• Modest growth through 2026 and into, 2027 and

• Persistent inflationary pressure

That combination complicates the outlook for the European Central Bank, where higher rates could remain under consideration.

The EUR has softened against the USD, while recovering modestly against GBP. Sustained appreciation appears less certain without a clearer improvement in underlying growth dynamics.

US yields rise as growth signals soften

US borrowing costs have moved higher than anticipated for 2026, raising the prospect of tighter financial conditions weighing on investment and demand. Interest-sensitive sectors, particularly real estate, remain exposed to this shift.

Recent activity data has undershot expectations across Q4 and Q1, while the labour market has shown some stabilisation following earlier weakness. Even so, downside risks persist, particularly if elevated costs in energy and food continue to constrain household spending.

There are no major data releases this week, but scheduled remarks from Federal Reserve officials Barkin and Paulson may influence rate expectations. Should inflation remain the primary focus, with less emphasis on growth risks, yields could continue to drift higher, offering some support to the USD into the latter part of the week.

Author 

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.