May looks set to be another volatile month for currency markets. Ongoing tensions in the Middle East remain the dominant macro risk, particularly for food and beverage businesses exposed to energy costs, global supply chains and imported ingredients. Any renewed escalation could quickly feed into higher inflation expectations and fresh calls for interest rate hikes.
What happened in April?
April saw risk sentiment improve modestly as a fragile ceasefire in the Middle East held. After a strong March rally, the dollar gave back some ground, allowing European currencies to recover. For food and beverage businesses, this translated into some short-term relief on import costs, especially for US-dollar denominated commodities and ingredients.
Euro strengthens as ceasefire endures
The euro gained around 1.5% against the dollar in April. This was driven partly by dollar weakness, but also by reduced geopolitical risk as the ceasefire held.
For eurozone-based producers sourcing ingredients such as cocoa, coffee, sweeteners or packaging materials priced in dollars, a firmer euro helped marginally ease input costs. However, margin pressure remained elevated due to higher energy prices feeding through to processing, refrigeration and distribution costs.
The pound benefits
Sterling followed a similar pattern, strengthening by roughly 3% against the dollar in April as investors moved away from safe-haven assets.
UK importers benefited from improved purchasing power for US-dollar inputs, including grains, flavourings and specialist additives. For exporters, however, stronger sterling reduced competitiveness in overseas markets, particularly the US, at a time when global demand remains uneven.
The dollar dips
The dollar lost some of its safe-haven appeal early in the month but recovered slightly towards the end of April as uncertainty resurfaced.
For multinational businesses reporting in dollars, currency volatility added another layer of complexity to earnings forecasts. Many producers remained focused on hedging strategies to protect against sudden reversals driven by geopolitical headlines.
What’s in store for May?
Currency markets remain acutely sensitive to developments in the Middle East, particularly the status of the Strait of Hormuz and global energy flows. For food and beverage businesses, the interaction between FX, fuel prices and inflation will be especially important in the weeks ahead.
The pound
Sterling remains vulnerable to shifts in risk sentiment. Any return to hostilities could weaken the pound as investors favour traditional safe-haven currencies such as the dollar and, to a lesser extent, the euro.
Conversely, a reopening of key shipping routes and lower oil prices could allow sterling to build on April’s gains. The Bank of England held rates at 3.75% in April, but persistent energy-driven inflation could prompt more hawkish rhetoric—or even a rate hike—in the near term.
Higher UK interest rates would typically support the pound but could weigh on domestic demand, adding pressure for companies already navigating higher costs and price-sensitive consumers.
The euro
The euro faces a similar balancing act. Renewed Middle East tensions would expose Europe’s reliance on imported energy, undermining confidence in the region’s economic outlook. For now, the currency is being supported by expectations that the European Central Bank may move towards rate hikes sooner than previously anticipated.
Headline inflation rose to 3% in April, up from 2.6% in March, largely due to higher energy costs.
Rising borrowing costs could constrain capital investment by food manufacturers, particularly in energy-intensive operations. At the same time, a stronger euro would help offset imported inflation for globally sourced ingredients.
The dollar
The dollar could regain momentum in May if geopolitical risks escalate or if no lasting agreement is reached over Middle East tensions, reinforcing its safe-haven status.
Markets are also watching the expected confirmation of Kevin Warsh as the next Federal Reserve chair. Seen as more dovish than Jerome Powell, Warsh may favour earlier rate cuts. Should investors price in faster easing, the dollar could weaken despite ongoing inflationary pressures.
This dollar weakness may reduce costs for global businesses importing US commodities, but could squeeze margins for US exporters selling into Europe and the UK.
The takeaway?
For businesses linked to the food and beverage sector, May is shaping up to be another month where FX risk, energy prices and inflation are tightly intertwined. Any escalation in Middle East tensions could reignite inflation concerns and strengthen European currencies if policymakers respond with tighter monetary policy.
However, geopolitical uncertainty remains high, and outcomes are difficult to predict. With volatility likely to persist, businesses exposed to multiple currencies may want to prioritise active FX management to protect margins and support more predictable cash flows in the months ahead.
