Market overview

Markets are still taking their cue from the same powerful trio: energy risk, central bank caution and uneven growth. Equities managed to finish slightly higher after a choppy session, while oil softened and US Treasury yields continued to grind lower.

The key theme remains the uncertainty around US-Iran talks. Early optimism faded after reports suggested no agreement has yet been reached, even if differences have narrowed. Iran’s uranium enrichment and control of the Strait of Hormuz remain central sticking points, keeping an energy risk premium in play.

For clients, the message is clear: headlines can still move FX and rates quickly. Oil remains the pressure point, the Fed is in no rush to validate rate-cut expectations, and growth outside the US continues to look fragile. That combination leaves the dollar well supported and risk appetite vulnerable to sudden shifts in tone.

USD: Fed patience keeps the dollar supported

The dollar is finding support from a familiar backdrop: resilient US activity, sticky inflation risk and a Federal Reserve that continues to push back against premature easing expectations.

The latest FOMC minutes showed officials increasingly concerned that inflation may take longer to return to target. Several policymakers also appeared uncomfortable with language that markets interpreted as leaning towards rate cuts.

Energy remains the complicating factor. Petrol prices are still firm, consumers have so far been cushioned by stronger tax refunds and retail spending has not yet shown a decisive break. That keeps the Fed cautious and raises the bar for a near-term policy pivot.

With US data still outperforming Europe, rate differentials have moved back in the dollar’s favour. Unless oil retreats meaningfully or US data deteriorates, the dollar should remain difficult to fade.

GBP: Soft PMIs reinforce a cautious BoE stance

Sterling has held up reasonably well, despite another soft set of UK data. The preliminary May PMIs showed services and the composite index slipping into contraction, while manufacturing held steady.

The data point to weaker business confidence, with geopolitical risk and domestic political uncertainty weighing on sentiment. Manufacturing resilience may reflect inventory front-loading rather than genuine strength.

Bank of England commentary did little to change the picture. Alan Taylor’s remarks leaned dovish, suggesting current policy settings may already be restrictive enough given sluggish growth and a softer labour market. However, markets already view Taylor as one of the more dovish MPC members, limiting the impact on sterling.

This morning’s consumer confidence and retail sales figures add to the downbeat tone. The overall data mix supports the case for the BoE to keep rates unchanged in June, leaving sterling rangebound unless political risk or growth concerns intensify.

EUR: EUR/USD looks increasingly exposed

EUR/USD has been broadly flat around the 1.16 area, but the underlying picture has weakened. Earlier support from narrowing German-US yield spreads has faded, with rate differentials now moving back in favour of the dollar.

Eurozone data continue to disappoint. Recent PMI releases point to a fragile growth backdrop, with the euro area, Germany, France and the UK all looking soft compared with a more resilient US economy.

Positioning is also a concern. With asset managers and leveraged funds still long euros, the risk of a deeper unwind has grown. Without a clear de-escalation in the US-Iran backdrop or a reversal in rate dynamics, EUR/USD looks vulnerable to further downside.

The near-term risk is a move towards 1.15, particularly if US data remain firm and the ECB’s tightening narrative loses further credibility.

Looking ahead

• US-Iran headlines remain the main short-term driver for oil, rates and FX.
• Energy prices are still the key inflation risk for central banks.
• The Fed is likely to keep pushing back against early rate-cut pricing.
• UK data support a BoE hold in June, but sterling remains sensitive to weak growth.
• EUR/USD downside risks are building, with 1.15 the key level to watch.