Market overview

The dollar enters today’s US non-farm payrolls release with momentum on its side. A stronger oil backdrop, firmer Treasury yields and persistent geopolitical risk have given investors plenty of reasons to stay long the greenback, while resilient US data continues to challenge hopes of an imminent Fed pivot.

Markets briefly found comfort in talk of a ceasefire between Israel and Hezbollah after President Trump’s announcement, but the relief faded quickly after the proposed terms were rejected. That has left oil supported, rates firmer and FX markets cautious.

For now, the message is clear: the dollar remains the cleanest expression of US resilience, geopolitical caution and renewed inflation risk.

USD: Payrolls could give bulls another catalyst

US data has kept the dollar well supported through the week. ADP reported that private employers added 122,000 jobs in May, the strongest increase since January 2025, while JOLTS openings rose to 7.618 million. Consensus is looking for non-farm payrolls growth of 87,000, leaving room for an upside surprise to extend the dollar’s advance.

The rates backdrop also supports that view. The 10-year Treasury yield is trading near 4.47%, more than 10 basis points above its level at the time of the April payrolls release. A firm jobs print would therefore land in a market already leaning back towards a hawkish Fed narrative.

Services data has added to the story. The ISM services index rose to 54.5 in May, a three-month high, pointing to solid demand. The concern is inflation. The prices-paid component climbed to 71.3, suggesting companies are still passing higher costs through to consumers.

The Fed’s Beige Book reinforced that theme, noting that Middle East tensions are feeding current inflation pressures, which are now evident across most districts. With oil firmer and yields rising, the dollar should remain underpinned unless the labour market delivers a clear downside surprise.

GBP: Sterling resilient but political risk is building

Sterling has had a strong week against most major peers, although the dollar has remained a tougher opponent. Firmer oil and robust US data have capped GBP/USD, but the pair continues to hold above 1.34 and remains locked inside the narrow range that has defined much of the past month.

The pound is being pulled in different directions. Higher oil prices are a headwind for the UK given its sensitivity to energy costs, while resilient equity markets are helping risk appetite and lending support to GBP/USD. This is not a simple one-factor market. FX is currently weighing commodities, equities and rates, but not all drivers are carrying equal weight.

At present, sterling is trading more closely with risk sentiment than with rate differentials. GBP/USD is showing a positive relationship with equities and a negative one with oil, while rates are playing a less decisive role. That may not last. Over time, rate spreads tend to regain influence, which suggests the current calm should not be mistaken for a lack of underlying tension.

Domestic politics could also become more relevant. Analysts argue that sterling is not fully pricing the risks linked to the Makerfield by-election, where Burnham is seen as the leading candidate. Market concern centres on perceptions around fiscal discipline, government borrowing and the UK’s sensitivity to gilt-market confidence. While Burnham has since said he would respect fiscal rules, earlier comments about not being “in hoc” to bond markets have left investors alert to renewed volatility.

GBP/EUR has twice tested resistance near 1.16 and may do so again if technical momentum and elevated UK yields continue to provide support. However, resistance at that level and rising political unease could limit the pound’s upside.

EUR: Rangebound euro waits for a US trigger

EUR/USD remains trapped in a tight 1.16 to 1.1650 range, with recent moves largely reversing one another rather than establishing a new trend. The pair has become a clean reflection of a market waiting for stronger direction on geopolitics, oil and US rates.

The euro’s latest bounce simply unwound the previous decline linked to renewed Middle East tension. That leaves the broader range intact and highlights how little conviction there is behind either side of the trade.

Today’s US jobs report is the key event. A strong payrolls print could drag EUR/USD back towards 1.16, particularly if Treasury yields move higher and Fed repricing gathers pace. Even so, a sustained break lower may require a sharper geopolitical escalation or a more decisive hawkish shift from the Fed.

For now, investors may prefer to wait until the June Fed meeting before committing to a stronger directional view, particularly as markets assess Kevin Warsh’s policy stance and leadership style.

Looking ahead

• US non-farm payrolls are the main event, with 87,000 jobs expected for May.
• An upside surprise should support the dollar and pressure EUR/USD towards 1.16.
• A softer labour print would challenge the recent move higher in yields and could trigger dollar profit-taking.
• Oil prices remain central to the inflation and FX narrative, particularly for GBP and EUR.
• UK political risk may become harder for sterling to ignore as the Makerfield vote approaches.
• GBP/EUR faces important resistance near 1.16, while GBP/USD remains resilient above 1.34.