Market overview
The dollar lost some ground yesterday, with the DXY testing support around 99, after reports suggested the US and Iran may be close to an interim agreement. The proposal would reportedly extend the ceasefire for 60 days while both sides continue talks on more difficult areas, including Iran’s nuclear programme.
For now, markets are treating the headlines with caution. There has been no official confirmation, and the role of the Strait of Hormuz in any temporary settlement remains unclear. Previous rounds of optimism have faded quickly, so investors may be reluctant to extend dollar shorts until there is firmer evidence of progress.
USD: Support under pressure, but not broken
The April PCE release did little to shift the dollar narrative. Headline inflation rose to 3.8% year on year from 3.5%, while the monthly reading eased to 0.4% from 0.7%, slightly below expectations. Core PCE edged up to 3.3% year on year from 3.2%.
The softer monthly print is unlikely to prompt a meaningful dovish rethink. Markets still expect the Fed to remain on hold for the rest of the year, with only a modest risk of one further hike priced by year-end.
A cleaner break below 99 would likely require official confirmation of a US and Iran agreement, alongside a clearer path towards reopening or stabilising flows through Hormuz.
GBP: Sterling supported by risk appetite, but upside looks limited
Sterling has drawn some support from improved risk sentiment, with GBP/USD holding above 1.34 this week. The move lacks strong conviction, however, leaving the pair broadly unchanged on the week. On the crosses, performance remains uneven, with the pound still trailing higher-beta currencies.
We remain cautious on GBP/USD upside. Even if geopolitical risks ease, a full reversal of dollar strength is not assured. US growth, relative rate support and renewed themes of dollar exceptionalism continue to matter, helped by higher energy prices, AI-led productivity gains and loose global fiscal settings.
On the domestic side, sterling has largely moved past the recent political risk premium. Media focus has faded, and the timing of any leadership challenge remains unclear. With Prime Minister Starmer signalling that he intends to stay in post, markets may struggle to price a credible contest before later in the year.
Andy Burnham’s more market-friendly tone has also helped. His commitment to existing fiscal rules, and the absence of calls for looser borrowing, have reduced the immediate fiscal risk premium. Even so, wider political uncertainty has not disappeared.
EUR: Options and rates point to a subdued tone
Euro sentiment looks increasingly restrained across the curve. Risk reversals across multiple tenors continue to show stronger demand for USD protection than EUR upside. The narrower range also suggests a more uniform market view, which may translate into quieter spot price action if the Hormuz impasse persists.
The rates backdrop offers limited support. Markets are close to fully pricing a 25bp ECB hike in June, but the scope for hawkish forward guidance appears constrained. The macro picture is softer than in 2022, uncertainty remains high, and the expected hike looks more like an insurance move than the start of a sustained tightening cycle.
That leaves the June move looking potentially symbolic: a signal that the ECB remains committed to keeping inflation expectations anchored, rather than a step with lasting policy momentum.
Looking ahead
- Confirmation of any US and Iran agreement would be the key catalyst for a deeper dollar move below 99.
- Clarity on Hormuz remains central to the market reaction, particularly for energy and risk sentiment.
- German and French preliminary inflation prints today will shape expectations for next week’s eurozone aggregate release.
- A downside inflation surprise that fails to shift June ECB pricing would strengthen the view that the hike is largely symbolic.
- GBP/USD upside may remain capped unless dollar support from US growth and rates begins to fade more decisively.
