Oil and Geopolitics Rekindle Dollar Strength
As expected, the Fed left rates unchanged for a fourth straight meeting, maintaining a cautious stance amid policy uncertainty. Inflation projections for end-2025 were revised up to 3% (from 2.7%), while growth was downgraded to 1.4% (from 1.7%). Chair Powell flagged tariffs as a renewed inflation risk, injecting a more hawkish tone.
This shift helped lift the dollar, which had been under pressure from softer US data. Rising Middle East tensions also boosted safe-haven demand, with the DXY briefly topping 98.800 before climbing past 99 early this morning.
However, the key driver behind the dollar’s rebound is oil. With prices near five-month highs, rising crude demand is fuelling USD demand. Options markets reflect this sentiment shift, with fewer traders now betting against the greenback.
Further geopolitical escalation could amplify the rally. Reports suggest the US is considering strikes on Iran, and Trump’s ambiguous comments add to the uncertainty. A mix of safe-haven demand and oil-driven USD buying could propel another leg higher.
Despite this, fundamentals remain shaky. Broader US sentiment is still negative, and without a shift in outlook, yield differentials alone may not sustain the rally.
Euro Holds Firm, Pound Slips
EUR/USD fell back to the $1.14 handle yesterday as the dollar gained on safe-haven flows and oil price strength. Still, hawkish ECB commentary and a better-than-expected ZEW index out of Germany offered some support.
EUR/GBP climbed for a third day, reaching £0.8560 after softer UK CPI data (3.4% y/y in May, down from 3.5%). This reinforced expectations for a more dovish BoE, with markets now pricing in two cuts by year-end. The Bank is expected to hold at 4.25% today.
BoE on Hold, Eyes on the Message
The BoE is set to keep rates unchanged at 4.25%, likely on a 7-2 vote—though risks of a more dovish 6-3 split have risen amid signs of a rapidly softening labour market. Sterling remains under pressure, down over 1% on the week and below $1.34.
Wage growth is undershooting forecasts, unemployment has ticked up, and PAYE employment dropped by 109k in May. Meanwhile, oil-driven inflation risks are resurfacing, complicating the outlook.
Today’s non-MPR meeting won’t offer fresh forecasts or a press conference, so the market will focus on any dovish shifts in tone. Expect the minutes to highlight labour market loosening and signal increased easing bias ahead of August.
Markets now price in 50bps of cuts for 2025, but weaker data could accelerate that path, adding downside pressure to sterling.
GBP remains highly sensitive to global risk sentiment, with downside risks tied to fading UK growth and yield appeal. GBP/EUR is below key moving averages, with next support near €1.15. For GBP/USD, eyes are on the 50-day MA at $1.3381, then $1.3064.
