Energy pressures keep the dollar supported
Market overview
FX markets open the week cautiously as geopolitical tensions and higher oil prices weigh on risk appetite. The dollar is firmer on elevated US yields and expectations of restrictive Federal Reserve policy, while sterling continues to outperform on improving UK political sentiment. The euro remains constrained by concerns that higher energy costs could further weaken regional growth.
Equity markets are broadly lower following fresh US strikes on Iran, with the sharpest losses seen in Asia. Oil is around 4% higher, adding to inflation concerns and pushing bond yields upward. Despite the weaker tone across risk assets, volatility in major currency pairs remains relatively contained.
USD: Inflation remains the key test
The dollar continues to benefit from resilient US growth, high yields and a Fed that remains reluctant to signal easier policy. Markets now price around 38 basis points of tightening before year-end, leaving rates as the main driver of dollar strength.
US CPI is the key event this week. A stronger core reading could lift Treasury yields and extend the dollar’s advance, while a softer print may ease tightening expectations.
Investors will also watch Chair Warsh’s first Congressional testimony, alongside PPI, retail sales, consumer sentiment and the start of earnings season.
GBP: Political clarity supports sterling
Sterling begins the week near three-week highs against the dollar and around one-year highs against the euro.
Andy Burnham is expected to become Labour leader on 17 July before taking office as Prime Minister. Markets are likely to view the transition positively, particularly if he maintains a disciplined fiscal stance.
GBP/USD could move higher unless US inflation surprises to the upside. Resistance sits near 1.3460, with support around 1.3350.
GBP/EUR remains technically strong after breaking above 1.1600 and 1.1632 to 1.1638. The pair reached 1.1752 on Friday and may extend towards 1.1800, although overbought signals suggest some consolidation is possible.
Thursday’s UK GDP release is the main domestic event. Output is expected to rise by 0.1% in May, led by services. Sterling is unlikely to react significantly unless the figures materially alter Bank of England expectations.
EUR: Energy risks limit upside
EUR/USD remains above 1.1400 after recovering from last week’s low near 1.1325. Softer US data has provided some support, but concerns over eurozone growth continue to limit gains.
Higher energy prices and trade uncertainty remain key headwinds, particularly given the eurozone’s greater sensitivity to external shocks.
The pair remains below its 21-day moving average near 1.1450. A softer US inflation reading could open the door to 1.1500, while a stronger print would likely restore pressure on the euro.
Looking ahead
US CPI: The main catalyst for rates and the dollar.
Fed testimony: Markets will assess Chair Warsh’s policy stance.
UK GDP: Growth of 0.1% is expected in May.
GBP/USD: Resistance at 1.3460 and support at 1.3350.
GBP/EUR: Momentum remains positive, although consolidation is possible.
EUR/USD: A break above 1.1450 would improve the near-term outlook.
Oil: Further gains would reinforce inflation and higher-for-longer rate expectations.