Market overview

The dollar has started the week on a firmer footing, supported by higher Treasury yields and a sharp rebound in crude prices. The broader market mood remains relatively composed, with equities still inclined to discount geopolitical risk, while oil and rates have reacted more directly.

Energy is the clear pressure point. WTI has risen by around 8%, while Brent is up roughly 7%, as traders reassess supply risk linked to US-Iran negotiations, regional military activity and Israel’s expanded ground campaign in Lebanon. Falling US oil inventories add to the sense that markets have less cushion if disruption persists.

This leaves inflation risk back in focus. A diplomatic breakthrough may still be possible, but markets appear less willing to take that prospect at face value. For FX, the result is a supportive near-term backdrop for the dollar, although not yet a decisive structural bull case.

USD: resilient data keeps the Fed in control

US manufacturing delivered a stronger message than expected. The May ISM manufacturing index rose to 54.0 from 52.7, beating consensus expectations of 53.0, while new orders improved to 56.8 from 54.1. The key concern remains prices paid, which stayed elevated at 82.1, only slightly below April’s 84.6.

The release reinforces the view that US activity is holding up, but it also keeps the inflation problem alive. That gives the Fed little incentive to soften its tone, with markets still leaning towards an extended hold and viewing the next policy move as more likely to be a hike than a cut.

The detail is less clean than the headline. Demand continues to run ahead of inventories, and some survey commentary points to doubts over how sustainable the current momentum really is. For now, the dollar benefits from stronger growth and sticky inflation, but the medium-term question is whether the economy can absorb higher energy costs without damaging demand.

GBP: cable remains range-bound and catalyst-light

Sterling remains driven largely by external factors. The initial jump in oil prices pushed GBP/USD back towards the 1.34 area, reflecting the pound’s sensitivity to risk appetite and energy-linked growth concerns. The move then reversed after President Trump suggested peace talks were still progressing, allowing cable to return to familiar levels.

The broader picture is one of volatility without direction. GBP/USD is trading close to where it began the year, near 1.3470, despite a wide journey in between. A sharp early-year dollar sell-off lifted the pair to a year-to-date high of 1.3868, before a two-month reversal took it down to 1.3159.

More recently, the market has settled into a 1.34 to 1.36 range. The oil shock is still relevant, but its impact on sterling appears to be fading at the margin. Rates, equities and broader risk appetite are again carrying more weight. Without a domestic catalyst, cable looks stable but directionless.

EUR: support is holding, but pressure is building

The euro remains under pressure as higher oil prices deepen the terms-of-trade challenge for the eurozone. EUR/USD has held above 1.16, helped by technical support around the 200-day exponential moving average, but rallies continue to stall below 1.17.

The balance of risks still points lower. US macro resilience is reasserting itself, while eurozone real yield support has faded. The ECB faces an uncomfortable trade-off: weak growth limits the case for tighter policy, but persistent energy-led inflation reduces the scope to ease.

That leaves the single currency exposed. A sustained break below 1.16 would likely mark a more meaningful bearish shift, particularly if geopolitical risk continues to support oil. Today’s eurozone preliminary CPI release is therefore important, with both headline and core inflation expected to edge higher ahead of the ECB’s 11 June meeting.

Looking ahead

• Eurozone preliminary CPI is the key data point, particularly given the ECB meeting on 11 June.
• Oil remains the main macro risk channel, with supply concerns feeding directly into inflation expectations.
• The dollar can stay supported if US data remains firm and energy keeps price pressures elevated.
• GBP/USD needs a clear catalyst to break out of the 1.34 to 1.36 range.
• EUR/USD support at 1.16 is important, but conviction behind that level is weakening.