Market overview

Markets head into the next round of central bank risk with the dollar still underpinned, but without the momentum needed for a cleaner breakout. The latest US inflation print was firmer at the headline level, rising to 4.2% in May from 3.8%, the largest increase in more than three years. Yet the details were less forceful. Core CPI rose by 0.2% on the month, below the 0.3% consensus and down from 0.4% previously, reinforcing the view that softer private spending is beginning to cool underlying demand pressures.

Treasuries recovered part of their earlier weakness and the dollar stayed relatively contained, suggesting markets had already positioned for a more aggressive inflation surprise. Oil’s limited reaction to the latest US-Iran exchange has also helped prevent a broader deterioration in risk appetite. Investors appear to be treating the escalation as serious but still largely contained, particularly as Washington continues to frame recent action as defensive and temporary.

EUR: ECB guidance holds the key

EUR/USD extended its recovery yesterday, closing higher for a third consecutive session after a measured response to the US inflation report. The pair has now retraced part of Friday’s sharp post-payrolls decline, although upside remains constrained by two forces: persistent geopolitical uncertainty around Hormuz and the dollar’s still-resilient rate support.

The focus now shifts to today’s ECB decision, where markets are positioned for a rate hike. The increase is likely to be framed as an insurance move, designed to show policy resolve as inflation risks rise against a weakening growth backdrop. The more important signal will come from the communication around what follows.

A hike paired with strong emphasis on optionality and meeting-by-meeting decision-making would probably cool expectations for further tightening and weigh on the euro. By contrast, a firmer message that the ECB is prepared to move again if inflation pressures broaden would offer EUR some near-term support. Staff projections will also matter, particularly if they show a sharper two-sided risk profile, with inflation risks higher and growth risks weaker. Without a clear tilt towards inflation concern, the meeting may struggle to deliver a lasting euro boost.

USD: Dollar supported, but resistance still matters

The dollar enters next week’s policy meeting with a constructive bias. There is limited data ahead capable of reversing the recent hawkish repricing, while the stalemate around Hormuz continues to provide a geopolitical floor for safe-haven demand.

That said, the next decisive move will likely depend on Kevin Warsh’s press conference. Markets will listen closely for any sign that the policy stance is being shaped by political pressure for lower rates rather than inflation fundamentals. A confident and independent tone could help the dollar challenge the 100 resistance area more convincingly. Anything softer, or more politically framed, risks limiting follow-through.

GBP: Sterling resilient, but upside still needs a catalyst

Sterling has held up well despite softer equities, geopolitical uncertainty and renewed dollar strength. GBP/USD remains in the high 1.33s and moved higher after the US inflation release, helped by the softer core reading and signs that much of the Fed hawkish repricing was already in the price.

The next technical test sits near the 200-day moving average around 1.3420. A sustained move above that area likely requires either weaker US data or a clearer de-escalation trend in the Middle East. For now, GBP/USD looks set to trade within familiar ranges, with support near 1.3300 and resistance closer to 1.3480.

Against the euro, sterling continues to look structurally firmer. GBP/EUR is again testing the 1.16 region, a level that has repeatedly capped gains this year and sits close to the pair’s long-term post-Brexit average. Momentum remains constructive while pullbacks stay shallow, and a dovish interpretation of the ECB decision could finally open the door to a sustained break above 1.16. A more hawkish ECB tone, however, may trigger another rejection from that ceiling.

Sterling’s relative resilience also reflects positioning and carry. Short GBP exposure remains crowded, while UK yields still offer an attractive pick-up versus several G10 peers. Even so, the support looks more external than domestic. If global conditions worsen materially, the UK’s softer macro and political backdrop may become harder for the market to ignore.

Looking ahead

• Today’s ECB decision is the main near-term event risk for EUR/USD and GBP/EUR.
• A rate hike with cautious guidance would likely weigh on the euro.
• A stronger ECB inflation signal could offer EUR short-term support.
• The dollar remains supported into next week’s policy meeting, but a break above 100 still needs a cleaner catalyst.
• GBP/USD needs a push through the 1.3420 area to strengthen the bullish case.
• GBP/EUR remains close to a potentially important break above 1.16.