Dollar Dominates as Inflation Fears Return and Israel / Iran trade fire.
Key Highlights
- The US dollar begins the week on the front foot after stronger-than-expected US employment data reinforced expectations that the Federal Reserve may keep interest rates higher for longer.
- EUR/USD remains under pressure ahead of Thursday’s ECB rate decision, with markets focused on whether policymakers maintain a hawkish stance despite slowing Eurozone growth.
- GBP/USD enters the week near recent lows as investors await Friday’s UK GDP release for fresh insight into the health of the British economy.
- Wednesday’s US CPI inflation report is expected to be the week’s most significant market-moving event. A higher-than-expected reading could strengthen the dollar further, while a softer figure may trigger a correction lower in USD.
- Thursday’s ECB rate decision and President Lagarde’s press conference will be closely watched for guidance on future monetary policy and the outlook for Eurozone inflation.
- Friday’s UK GDP, Manufacturing Production and Trade Balance figures will provide important clues on UK economic momentum and could generate increased volatility in Sterling pairs.
- Early-week sentiment indicators from Germany, including Factory Orders, Industrial Production and Sentix Investor Confidence, will offer insight into the strength of Europe’s largest economy.
- Traders will also monitor US Trade Balance, NFIB Small Business Optimism and consumer sentiment data for further indications on the resilience of the US economy.
Market Recap
FX markets ended last week with the US dollar firmly back in control. A stronger-than-expected US jobs report showed payrolls rising by 172,000, pushing investors to price a higher probability of Fed tightening later this year. The move lifted the dollar to a two-month high and weighed on the major European currencies. EUR/USD traded down near $1.1507, while GBP/USD slipped towards $1.3317, its weakest level in around three weeks.
The euro also struggled as investors balanced the likelihood of an ECB rate hike against weaker eurozone growth signals. Sterling was unable to find much support, with UK data due this week expected to give a clearer view on whether recent economic momentum is fading. Broader risk sentiment was also fragile, with higher oil prices and renewed Middle East tensions adding to safe-haven dollar demand.
Our Thoughts for the Week Ahead
This week is likely to be driven by inflation and central-bank expectations. The key question for FX markets is whether US CPI confirms the market’s renewed concern that inflation is re-accelerating. A hotter reading would likely support the dollar further and keep GBP/USD and EUR/USD under pressure. A softer print could trigger some dollar profit-taking, but the broader backdrop still favours caution.
For sterling, Friday’s UK GDP release will be important. A weak print would reinforce concerns that the UK economy is losing momentum and could leave GBP vulnerable, particularly against the dollar.
For the euro, the ECB meeting is the central event. A rate hike looks likely, but the tone of President Lagarde’s press conference will matter more for EUR direction. If the ECB sounds concerned about inflation despite weaker growth, EUR/USD could stabilise.
Overall we expect the US dollar to remain supported this week, particularly if US inflation data reinforces expectations of higher interest rates for longer. The ECB meeting and UK GDP figures are likely to be the main drivers for the euro and sterling respectively, with both currencies facing increased volatility around these releases. While EUR and GBP could find support from stronger-than-expected data, we maintain a cautious bias towards further USD strength. Overall, we expect GBP/USD and EUR/USD to remain sensitive to economic data and central bank commentary throughout the week.
Economic Calendar
Monday 8th June
7:00 AM EUR German Factory Orders m/m
9:30 AM EUR Sentix Investor Confidence
Tuesday 9th June
12:01 AM GBP BRC Retail Sales Monitor y/y
7:00 AM EUR German Industrial Production m/m
7:00 AM EUR German Trade Balance
11:00 AM USD NFIB Small Business Index
1:15 PM USD ADP Weekly Employment Change
1:30 PM USD Trade Balance
3:00 PM USD Existing Home Sales
3:00 PM USD Final Wholesale Inventories m/m
9:30 PM USD API Weekly Statistical Bulletin
Wednesday 10th June
1:30 PM USD CPI m/m
1:30 PM USD Core CPI m/m
1:30 PM USD CPI y/y
1:30 PM USD Core CPI y/y
Thursday 11th June
1:15 PM EUR ECB Main Refinancing Rate
1:15 PM EUR ECB Monetary Policy Statement
1:30 PM USD PPI m/m
1:30 PM USD Core PPI m/m
1:30 PM USD Unemployment Claims
1:45 PM EUR ECB Press Conference
Friday 12th June
7:00 AM GBP GDP m/m
7:00 AM GBP Manufacturing Production m/m
7:00 AM GBP Industrial Production m/m
7:00 AM GBP Goods Trade Balance
3:00 PM USD Prelim UoM Consumer Sentiment
3:00 PM USD Prelim UoM Inflation Expectations