USD: A stronger US dollar runs into harder questions
The US dollar has finally done what it spent most of the past year threatening to do: break out of its range. DXY has cleared the 100.50 ceiling and is trading at a one-year high, helped by a flatter US curve, a fresh drop in EUR/USD through 1.14, renewed pressure on USD/JPY above 161, and a broader risk-off mood that sent the Nasdaq down 2% yesterday. Part of that move still reflects the Fed’s June pivot, when rates were left at 3.50%–3.75% and the old easing bias was quietly dropped. Since then, markets have been repricing a higher-for-longer path, and the dollar has been one of the clearest expressions of that shift.
Kevin Warsh’s arrival has added another layer. Markets are still leaning on the SEP and the dot plot, even as the new chair hints that the Fed’s communication framework will become less predictable and more conditional. Thinner guidance usually commands a bigger uncertainty premium, especially at the front end, where two-year yields have absorbed most of the repricing. The reaffirmation of Fed independence has also narrowed part of the US policy risk premium that weighed on the dollar earlier this year, giving the greenback another tailwind as risk appetite fades into month-end.
Still, the move is getting tactically crowded. Oil’s support for the dollar is fading as the US-Iran ceasefire holds and the terms-of-trade boost from higher crude starts to unwind, while bullish dollar positioning and sentiment already look stretched. There is also a case that the best of the US data surprise is behind us, even if Europe offers little real competition; softer price signals in recent French and German PMIs, along with a more dovish tone from Lagarde, have only widened the rate gap in the dollar’s favour. Another risk is that June marks peak hawkishness for the Fed, a view that would gather force if CPI prints in the coming months begin to soften.
For now, the breakout is real, but with DXY still pushing higher and RSI nearing overbought territory, the next move up may need more than momentum alone.
EUR: EUR/USD pushes through 1.14
The euro has seen little benefit from the recent improvement in de-escalation momentum following the announcement of a US-Iran peace deal two weeks ago, with oil prices having fallen to their lowest levels since early March. In fact, renewed focus on rate differentials has shifted the balance of risks for the common currency. Lower oil prices are now being interpreted through the lens of a less hawkish monetary outlook, rather than through easing growth concerns linked to energy inflation, which dominated earlier in the conflict. Lagarde’s unexpectedly dovish remarks on Monday added to the erosion of the hawkish backdrop, as she indicated no need for a more forceful policy response to the fallout from the Middle East situation. Her stance sits somewhat at odds with other officials, including Peter Kažimír, who maintained a more assertive hawkish tone as recently as yesterday, stating, “I think the direction is clear, and I think we still have work to do.”
The lack of clear consensus within the ECB, combined with June’s PMI release pointing to a slowing pace of price growth, has weighed on the euro. Any signal of ECB caution is particularly impactful when set against a Federal Reserve that has recently reasserted a hawkish stance.
EUR/USD has broken south of the 1.14 handle, a key support that has been approached only three times since the pair moved into the 1.15–1.18 range in summer 2025. This episode differs from the other previous two tests, however, as the downside pressure is now underpinned by fundamentals rather than sentiment. A freshly-established hawkish Fed alongside a more cautious ECB underscores growing divergence in their policy outlook. While evolving Middle East peace developments may have started to prompt central banks to lower their hawkish guard, resilient US macro data suggests the Fed’s stance may prove a bit stickier, increasing the likelihood of a firmer move lower.
EUR/USD’s downside is beginning to look quite technically stretched, and we would expect some consolidation ahead of tomorrow’s US PCE report. 1.340, followed by 1.300, stand as clear downside targets should the US front end reprice more hawkishly on a hot inflation report.
GBP: Risk-off hurts sterling
Sterling came under pressure yesterday, though the move was driven far more by the dollar leg of the equation evidenced by sterling’s resilience versus the euro and high-beta peers. With global equities retreating, the VIX volatility index jumping, and broader risk appetite deteriorating, investors once again gravitated towards the dollar’s safe-haven qualities. Since the escalation of the Iran conflict, the greenback has re-established some of the defensive appeal that had been absent for much of 2025, helping push GBP/USD under 1.32.
In many respects, the move also reinforces a key conclusion from our Brexit retrospective. Since the 2016 referendum, sterling has become a far more risk-sensitive currency, with its beta to global risk sentiment having increased materially. As a result, GBP increasingly behaves like a risk asset during periods of market stress, tending to weaken alongside equities rather than offering any defensive characteristics of its own.
The broader risk-off tone appears largely linked to hawkish Fed repricing, although there is a growing sense that markets may be leaning too aggressively into the prospect of tighter US policy. Should that narrative moderate, some of the recent USD support could prove vulnerable.
In the UK, attention is shifting from Starmer’s departure towards the composition of a likely Burnham-led government. Former Health Secretary Wes Streeting’s decision to back Burnham rather than challenge him has increased the prospect of a swift transition, with Burnham potentially installed as prime minister by mid-July. Just as importantly for markets, it has fuelled speculation that Streeting could become Chancellor, a prospect generally viewed more favourably by investors than alternatives such as Ed Miliband.
Meanwhile, June PMIs reinforced concerns over the UK growth outlook. Services activity moved deeper into contraction, dragging the composite index lower, while manufacturing strength appeared largely stockpiling-driven. The result leaves the Bank of England facing an increasingly uncomfortable mix of persistent inflation pressures and weakening activity, a combination unlikely to provide much support for sterling in the near term.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: June 22-26
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
