USD: Dollar firms as oil risk builds
The US dollar opened the week firmer against its major peers, helped by a modest rise in yields and a sharp rebound in oil after renewed Middle East headlines. Even so, the broader market tone still feels a lot like May, with equities mostly looking through the geopolitical noise while oil and rates react more immediately. However, the move in the dollar looks more like a headline-driven lift, keeping a price action pattern of a dollar not moving in lockstep with oil for some time. The main question is whether June brings another round of markets absorbing the tension and moving on, even as hopes for a deal keep running into the same stalemate.
Oil is the bigger story to start the week, with WTI up about 8% and Brent up roughly 7%. Markets are reacting to fresh uncertainty around US-Iran talks, recent military exchanges involving US interests, and Israel’s expanding ground offensive in Lebanon. At the same time, as US total oil inventories decrease, markets may have less buffer if disruptions drag on. A deal may still be close, but that has been the message for weeks, and traders are putting more weight on the risk that disruption lasts longer than expected. As long as that remains the backdrop, energy is likely to keep inflation pressure elevated.
On the data side, the May ISM manufacturing report was strong on the surface and better than expected. The headline index rose to 54.0 from 52.7, above the 53.0 consensus, while new orders climbed to 56.8 from 54.1. The release also showed prices paid stayed very high at 82.1, even if that was a touch below April’s 84.6. In simple terms, activity improved, but price pressure in the factory pipeline is still intense.
That mix gives the Fed room to keep a hawkish bias, with markets still leaning toward a long hold and seeing the next move as more likely to be a hike than a cut. Still, the details under the headline are less reassuring. Demand has been running ahead of inventories for months, and survey responses suggest some firms are questioning how long this pace can last. Manufacturing is expanding, but it is doing so in a cost environment that is becoming harder to absorb.
That is why investors should be careful about reading too much into the strong headline or the AI-driven boost to activity. Business momentum has helped support the economy, but if energy stays high and inflation remains sticky, the expansion could start to overheat rather than broaden in a healthy way. The dollar is getting some near-term support from that mix, but the medium-term outlook still depends on whether growth can hold up without inflation doing more damage to demand. Right now, the signal is not a clean dollar bull story, while FX markets remain reluctant to fully price a more lasting geopolitical shock.
GBP: Back to square one
Sterling remained firmly at the mercy of external drivers yesterday, with Middle East headline volatility dictating price action. A sharp spike in oil prices initially dragged GBP/USD back toward the 1.34 handle, reflecting the pound’s energy sensitivity and risk‑beta profile. However, the move quickly reversed as President Trump signalled that peace talks remain on track, allowing cable to retrace losses and re‑enter familiar territory.
With little in the way of domestic catalysts, it is worth stepping back and framing the broader 2026 price action regime. Noticeably, GBP/USD is trading almost exactly where it began the year (~1.3470), masking what has been a volatile path. Early January saw a sharp USD sell‑off on US policy credibility and Fed independence concerns, driving a near 3.5% surge to a year-to-date high of 1.3868. This was followed by a sustained two‑month reversal, with cable falling around 5% to a trough of 1.3159, marking peak pessimism around the US‑Iran conflict.
Since then, the regime has shifted. The oil shock has shown diminishing marginal impact, while rates and risk sentiment channels have regained prominence. Sterling has benefited from its pro‑cyclical nature, particularly amid the rebound in global equities from April.
More recently, price action has settled into a range‑bound consolidation between 1.34 and 1.36, with the pair oscillating around its key daily moving averages. Aside from a brief political‑driven dip in mid‑May, GBP/USD remains directionless but stable, reflecting a market awaiting a clearer catalyst -either from geopolitics, rates, or a break in the current risk regime.
EUR: Oil spike tests 1.16 support
The euro came under renewed pressure yesterday, registering its largest daily decline since 19 May, as higher oil prices reinforced the negative terms‑of‑trade shock for the euro area. Despite the sell‑off, EUR/USD continues to hold the 1.16 handle, where the 200‑day exponential moving average is providing a key layer of technical support. On the topside, a dense cluster of moving averages just below 1.17 continues to cap rallies, reinforcing the pair’s entrenched range.
The broader risk bias remains tilted to the downside. US macro resilience is reasserting itself, following a brief period last year when eurozone real yield dynamics offered some support to the single currency. That support has faded. Forward real rate differentials are no longer euro‑positive, while the ECB faces an increasingly difficult policy trade‑off: limited scope to tighten further given weakening growth, but little flexibility to ease in the face of persistent, energy‑driven inflation.
This asymmetry leaves the euro exposed. In the absence of a clear improvement in the geopolitical backdrop, particularly around the Strait of Hormuz, the risk of a sustained break below 1.16 is building. Such a move would likely signal a broader repricing of EUR/USD toward lower levels.
Attention today turns to Eurozone preliminary CPI. Both headline and core inflation are expected to tick higher, driven in part by the ongoing energy shock. While much of the outcome has been pre‑flagged by national data, the release remains important as the final inflation print ahead of the ECB’s 11 June meeting.
For now, the euro remains range‑bound but vulnerable, with support holding, but conviction increasingly fragile.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: June 1-5
All times are in BST
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*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.
