Market overview

The dollar starts the week on firmer footing, helped by stronger US data and another leg higher in oil prices. Crude has risen by more than 5% as uncertainty over US-Iran talks continues to support energy markets, while investors have also found fresh reason to back US exceptionalism.

The macro story has turned more supportive for the greenback. The US economic surprise index has climbed to its strongest level since late 2023, April JOLTS showed job openings at their highest since May 2024, and ADP reported 122,000 jobs added in May. Both ISM manufacturing and services PMIs also beat expectations, pointing to an economy that may be regaining momentum at the margin.

That gives the dollar a firmer near-term base, but the rally is not without conditions. Any credible de-escalation in the Middle East would reduce the energy and safe-haven support currently underpinning the currency. Renewed uncertainty on US trade policy, or further yen-led dollar selling, could also spill over into broader FX. For now, the dollar remains well bid, but its support is increasingly tied to the continuation of the current macro and geopolitical backdrop.

USD: Data strength reinforces the bid

The US continues to offer the cleanest hawkish narrative across the major currencies. Growth indicators have improved, labour market data remain resilient and Treasury yields have adjusted accordingly. That mix has encouraged markets to rebuild confidence in the dollar, particularly against currencies where domestic growth and inflation stories look less convincing.

Higher oil prices add another layer of support. The US is better placed than Europe and the UK to absorb an energy shock, while elevated geopolitical risk still favours the dollar’s safe-haven profile. As a result, the greenback remains supported both by relative growth dynamics and by the broader risk backdrop.

The key caveat is that this is a fragile form of dollar strength. A retreat in oil prices, a diplomatic breakthrough in the Middle East or a softer US payrolls print could all challenge the move. Until then, the balance of risks remains skewed towards further dollar resilience.

GBP: Sterling steady, but dollar strength dominates

GBP/USD slipped yesterday, with the move largely driven by renewed dollar demand rather than a material deterioration in the sterling story. Higher oil prices and firmer US data have shifted rate differentials back in favour of the dollar, limiting sterling’s ability to recover.

Political risk around the pound appears to have eased for now, but the UK macro backdrop remains less supportive than the US. Softer growth, a more fragile labour market and greater energy sensitivity make the case for a more forceful Bank of England tightening cycle harder to sustain. Inflation risks remain relevant, but the starting point is less extreme than during the 2022 energy shock.

Markets expect the BoE to leave rates unchanged on 18 June, but the vote split will matter. Megan Greene and potentially Catherine Mann could join Huw Pill in backing a hike, which may offer sterling some support. That said, any benefit is more likely to appear in GBP/EUR than GBP/USD, where the dollar remains the dominant driver.

Technically, GBP/USD found support near 1.3420 after yesterday’s decline, keeping the pair within the tight range seen since mid-May. A stronger US payrolls print would likely open the door to a more meaningful downside test.

EUR: Range bound, with risks tilted lower

EUR/USD remains stuck near the lower end of its recent range around 1.16, trading below key moving averages and still lacking a clear catalyst for recovery. Price action has been contained so far this month, but the underlying bias continues to lean lower as geopolitical risk persists and rate differentials move back in favour of the dollar.

Trade risk is becoming a greater concern for the euro. A broader US tariff push would be particularly difficult for Europe, given its reliance on external demand and imported energy. Export sectors exposed to direct US competition could face renewed pressure, adding to an already fragile growth outlook and reinforcing the eurozone’s relative underperformance.

The rates backdrop offers only limited support. Although inflation has moved higher to 3.2%, markets already price a near-term ECB hike, largely as an insurance move. Beyond that, conviction is thin. Weak activity data and stagflation concerns make it difficult to build a more aggressive tightening story, leaving euro yield support vulnerable to fading further.

With the US economy still showing stronger momentum, EUR/USD looks increasingly exposed. The pair remains range bound for now, but with trade risks building and rate support weakening, a renewed test of 1.16 looks likely if dollar strength extends.

Looking ahead

• US payrolls will be the main near-term test for the dollar’s momentum.
• A stronger jobs print would reinforce the hawkish Fed narrative and pressure GBP/USD and EUR/USD lower.
• Any Middle East de-escalation could reduce oil and safe-haven support for the dollar.
• The BoE vote split on 18 June will be key for sterling, especially against the euro.
• ECB communication will matter, with markets looking for signs of whether any hike is a one-off insurance move or the start of something broader.