Dollar Weakens Against Euro and Pound as Markets Assess Fed Policy Outlook

Market dynamics are developing amid changes in the geopolitical situation in the Persian Gulf region. Over the weekend, the United States and Iran exchanged attacks on each other’s infrastructure, with both sides accusing one another of violating the terms of the 60-day truce. However, the conflict was resolved on Sunday. According to White House representatives cited by CNBC, hostilities have ceased, the Strait of Hormuz has reopened for commercial shipping, and technical negotiations on all provisions of the memorandum of understanding will continue. Against this backdrop, President Donald Trump reiterated that he was ready to resume the confrontation if no compromise was reached. The market reacted only modestly, as such rhetoric has become familiar to investors.

June labour-market data will be released on Thursday at 14:30 (GMT+2). According to forecasts, the market is expected to remain resilient, with unemployment holding at 4.3% and nonfarm payrolls reaching 114,000. This could increase the likelihood of further monetary tightening by the US Federal Reserve, especially as inflationary pressure remains significant: the May personal consumption expenditures price index rose from 3.8% to 4.1%, while economic recovery remains solid, with first-quarter gross domestic product (GDP) reaching 2.1% versus expectations of 1.6%. At present, traders and analysts remain divided over the Fed’s next steps. Market participants expect an interest-rate increase in September, while economists surveyed by Reuters expect rates to remain unchanged through the end of the year.

Eurozone

The euro is strengthening against the yen and the US dollar but weakening against the pound.

Today, the European Central Bank (ECB) released lending data. In May, lending to non-financial companies accelerated from 3.4% to a three-year high of 4.0%, while lending to households increased from 3.0% to 3.1%, reflecting a gradual and steady economic recovery in recent months. June inflation data will be released on Wednesday at 11:00 (GMT+2). According to forecasts, the consumer price index may reach 3.0% year-on-year, significantly above the 2.0% target, prompting ECB officials to consider further monetary tightening.

United Kingdom

The pound is strengthening against the euro, the yen, and the US dollar.

Investors and forex traders are focused on remarks from the leading candidate for UK prime minister and former Mayor of Manchester, Andy Burnham. He stated that his economic plans are consistent with the Labour Party’s election platform and reaffirmed his commitment to fiscal rules, significantly reassuring investors who had feared that he might sharply increase government spending. May lending data were also released today. Consumer borrowing totalled GBP 4.6 million, compared with expectations of GBP 6.0 million; mortgage lending stood at GBP 2.89 million versus forecasts of GBP 4.60 million; and the number of approved mortgages reached 56,210, compared with preliminary estimates of 63,000, marking the lowest level since December 2023. Analysts note that these figures are being constrained by uncertain inflation prospects and the rising cost of living.

Japan

The yen is weakening against the euro, the pound, and the US dollar.

May retail-sales data were released today. Sales growth accelerated from 2.8% to 5.3% year-on-year, exceeding forecasts of 3.1%, while the figure for hypermarkets rose from 2.0% to 5.0%, signalling an economic recovery. With inflation continuing to remain above the Bank of Japan’s 2.0% target, these figures may encourage officials to continue tightening monetary policy. In addition, investors are assessing the draft long-term programme of Prime Minister Sanae Takaichi’s government, which targets annual real GDP growth of at least 1.0% and nominal GDP growth above 3.0%.

Australia

The Australian dollar is weakening against the euro and the pound, while showing mixed dynamics against the US dollar and the yen.

Today, Reserve Bank of Australia (RBA) Deputy Governor Christopher Kent outlined the measures the regulator could take if the country faced a financial or economic crisis and interest rates had to be reduced close to zero, as happened during the COVID-19 pandemic. He named term-lending facilities, government-bond purchase programmes, negative interest-rate policy, and foreign-asset purchases as the main tools, noting that actual measures would depend on the nature, duration, and severity of the shock. Minutes from the RBA’s latest meeting will be released on Tuesday at 03:30 (GMT+2), with investors looking for clues about the future path of monetary policy. It should be recalled that the regulator kept the interest rate unchanged at 4.35% in the middle of the month.

Oil

Oil prices are attempting to rise again after reciprocal US-Iran attacks over the weekend. Investors feared that peace talks could be disrupted, but White House representatives said on Sunday that Washington and Tehran had agreed on a ceasefire and the resumption of free shipping transit through the Strait of Hormuz. Another round of consultations is expected in Doha, Qatar’s capital, on Tuesday, involving President Trump’s personal envoys Steve Witkoff and Jared Kushner. Meanwhile, according to maritime-tracking companies, at least 8.0 million barrels of crude produced in Qatar and the United Arab Emirates were transported through the strait over the previous two days. Continued growth in hydrocarbon exports from the Persian Gulf region could put pressure on prices in the near term.