Market overview

The dollar has started the week with renewed authority, breaking into the 100 area on the DXY after a powerful combination of stronger US labour data, firmer oil prices and rising geopolitical risk pushed investors back towards the greenback.

Friday’s payrolls report delivered a clear upside surprise. May job growth beat every forecast, unemployment held at 4.3%, and upward revisions to the previous two months lifted the three-month jobs gain to its strongest pace in more than two years. After a prolonged period of weak employment momentum, the data have revived the view that the US labour market may be reaccelerating.

That matters for the Fed. A run of firmer US data has encouraged markets to price a more hawkish policy path, with investors now discounting just over one rate hike by year-end. At the same time, renewed missile exchanges between Israel and Iran have kept haven demand alive, while Brent crude’s move towards $97 a barrel adds another layer of support for the dollar through inflation and terms-of-trade channels.

For now, the dollar has the cleaner story. Higher yields, stronger data and geopolitical risk are all pulling in the same direction. The challenge is whether DXY can hold above 100, which will likely require continued hawkish US data, limited progress on Hormuz-related peace efforts and a relatively firm message from Kevin Warsh next week.

USD: Fed repricing keeps the dollar in demand

The dollar’s break above the 99.00 to 99.50 range marks a meaningful shift after several weeks of consolidation. The move has been driven by both macro strength and risk aversion, with investors reassessing the likelihood of further Fed tightening as US data continue to surprise to the upside.

This week’s CPI print is the next key test. A move to 4.2% from 3.8% would reinforce the market’s hawkish repricing and could help DXY consolidate above 100. In that scenario, dips are likely to remain well supported, particularly while oil prices stay elevated and Middle East tensions remain unresolved.

The main risk to the dollar is a softer inflation print or a clear de-escalation in the Gulf, either of which could take some heat out of the rates and haven bid. Until then, the balance of risks remains skewed towards further dollar resilience.

GBP: Politics ignored for now as sterling trades the dollar story

Sterling weakened against the dollar on Friday as the stronger US jobs report drove broad dollar demand. Against the euro, however, the pound was more stable, with GBP/EUR little changed despite fresh domestic political headlines.

Andy Burnham’s confirmation that he would seek to enter a potential Labour leadership contest, should he win the Makerfield by-election on 18 June, has not yet created a meaningful market response. Investors appear reluctant to price the risk until the threat to Keir Starmer’s leadership becomes more immediate and the timeline becomes clearer.

For now, sterling remains more sensitive to external drivers than domestic politics. GBP/EUR ended last week 0.4% higher, but near-term upside may be capped if the ECB adopts a firmer tone than markets expect. We see 1.1600 as initial resistance and 1.1560 as short-term support, with a mild downside bias towards 1.1540 if the ECB leans hawkish.

GBP/USD has a more vulnerable profile after breaking below 1.3420. A hot US CPI report, combined with limited progress on Hormuz, could open the door to further losses towards 1.3300, the mid-May lows.

EUR: Break below 1.16 exposes deeper downside

The euro posted its sharpest one-day fall since early March on Friday, dropping more than 0.7% against the dollar and finally breaking decisively below the 1.1600 support level. That move had looked increasingly likely as the balance of macro risks continued to turn against the single currency.

The pressure on EUR/USD is now broader than a single data release. Rate differentials are shifting back in the dollar’s favour, eurozone growth is losing momentum, energy prices remain uncomfortably high and renewed tariff uncertainty is adding further pressure to Europe’s export-sensitive economy.

Friday’s US payrolls report acted as the trigger. Stronger US data reinforced the risk that global financial conditions may stay tighter for longer, hitting equities, lifting volatility and removing the supportive risk backdrop that had previously helped the euro hold up.

The geopolitical backdrop has also become less favourable. Renewed exchanges between Iran and Israel have undermined confidence and strengthened haven demand for the dollar. With 1.1600 now broken, attention turns to 1.1500, followed by the year-to-date low near 1.1410. Below that, the 100-week moving average around 1.1280 becomes the next major support area.

This week’s ECB meeting is now in focus. Markets still expect a rate hike, but the move is increasingly seen as precautionary rather than the start of a sustained tightening cycle. With growth softening and stagflation risks rising, rate policy alone may struggle to provide lasting support for the euro.

Looking ahead

• US CPI is the main event, with a move to 4.2% likely to reinforce the dollar’s hawkish momentum.
• DXY holding above 100 would strengthen the case for a broader dollar breakout.
• Brent crude near $97 keeps inflation risks elevated and supports the dollar’s haven appeal.
• Any progress on Hormuz or a clear de-escalation between Israel and Iran could reduce demand for dollar protection.
• The ECB meeting will be critical for EUR/USD, especially if guidance fails to match market expectations.
• GBP/EUR remains range-bound for now, with domestic political risk still too distant to drive sustained repricing.