Trump strikes rewrite the playbook
Over the weekend, President Trump launched airstrikes on three Iranian nuclear facilities — a move that not only bolstered Israel’s campaign to dismantle Iran’s nuclear program but also drew the U.S. further into the regional conflict. The decision surprised many. Trump had previously campaigned on an anti-interventionist platform, advocating against deeper U.S. entanglement in the Middle East. And as recently as late last week, he appeared willing to give diplomacy a two-week window before resorting to military action. That posture changed swiftly.
In the lead-up to the strikes, markets were pricing in diplomatic progress: the euro strengthened, the dollar softened, safe havens were muted, and oil dropped nearly 3% on Friday — signaling a partial return to the pre-conflict playbook. But the U.S. intervention has now reversed that momentum. While the broader bias still leans toward structural dollar weakness, escalating Middle East tensions are injecting support for the greenback via the commodity channel. That channel will remain central in the days ahead, as Iran — according to state-run TV — has vowed to retaliate by closing the Strait of Hormuz, a critical artery through which about one-fifth of global oil flows. Although any such action would require approval from Supreme Leader Ayatollah Ali Khamenei, it would mark a first in the Islamic Republic’s nearly five-decade history. As such, even the threat alone is enough to keep the dollar bid, with positioning set to adjust as investors begin to unwind their bearish USD bets.
Aside from geopolitics, the week ahead is set to be dominated by Fed Chair Jerome Powell’s semi-annual testimony to Congress, offering markets a fresh read on how firmly the central bank is holding its nerve amid rising political pressure and evolving data risks. In a sharply divided political landscape, Powell is expected to underscore the Fed’s independence and reiterate that any rate decision will remain firmly data-dependent. While some lawmakers, particularly from the Republican side aligned with President Trump, may push for earlier cuts, Powell is likely to hold the line, warning against premature easing amid ongoing inflation uncertainty.
That uncertainty remains high. While this Friday’s core PCE deflator is forecast to rise a subdued 0.1% MoM, markets view this as the calm before a possible tariff-led inflation storm in Q3. The lingering question: will the inflation spike be fleeting or more persistent? Until there’s clarity – likely not before the December FOMC meeting – the Fed is seen sticking to its cautious pace.
If Powell sticks to script and the core PCE comes in cool, risks this week skew toward renewed dollar softness. However, any hawkish surprises, or geopolitical flare-ups, could offer the greenback more of a lifeline.
Cautious euro tone ahead of PMIs
The euro pulled back from $1.16 versus the U.S. dollar last week, but appears to be in a consolidation phase, trading above its 21-day moving average. However, the common currency arguably enters the week on a defensive footing as markets await fresh signals from the euro area PMIs, where manufacturing is expected to stall just below 50. The boost from early-year exports to the U.S. appears to be fading, and weak consumer sentiment continues to sap momentum from the services sector. With growth indicators stagnating and U.S. involvement in the Middle East conflict adding further pressure, the euro is likely to remain particularly sensitive to downside data surprises.
Friday’s eurozone inflation print could add a layer of volatility. While headline disinflation has progressed, the focus remains on services prices, which may prove sticky. Any upside surprise could momentarily support EUR via shifting ECB expectations, though we think the bar for a policy rethink remains high.
Meanwhile, the NATO summit may offer longer-term signals for fiscal policy, as member states move toward a 5% of GDP target for defence and resilience spending. That could eventually raise questions about fiscal divergence within the bloc, particularly between core and periphery nations.
Outside the euro area, Middle East tensions and oil price volatility remain the wild cards. Any escalation risks feeding into safe-haven flows, though the euro has so far shown limited sensitivity — underperforming versus USD and CHF during sharper risk-off episodes, but outperforming versus the pound.
Sterling two-front battle
GBP/USD found support above $1.3400 during Monday’s Asian session, rebounding into $1.3420 territory after a sharp drop from weekly highs of $1.3622. The pound suffered through a bearish week, driven primarily by escalating geopolitical tensions, culminating in direct U.S. involvement in the conflict over the weekend. The renewed “risk-off” tone weighed heavily on risk-sensitive currencies like sterling, with key 8- and 21-day moving averages cross lower — sometimes seen as a negative signal for price action. Meanwhile, soft domestic data offered little offset, as disappointing UK retail sales reinforced an already fragile streak.
The pair now faces pressure from both foreign and domestic fronts. Externally, fears of a broader regional conflict — including the potential closure of the Strait of Hormuz, through which roughly a fifth of global oil flows — could stoke oil prices and provide a fresh leg of support for the dollar, exerting further downside pressure on GBP/USD. On the domestic side, last week’s data highlighted fiscal strain, with UK government borrowing rising to £17.7bn in May, up from £17.0bn a year earlier. Coupled with signs of a cooling labour market, the figures point to a multi-faceted weakness in the UK’s macro backdrop.
Looking ahead to the autumn budget, the chancellor may have already lost the £9.9bn fiscal headroom regained in March, amid weak growth and higher debt servicing costs. With policy rates likely to remain above 4% by budget time, the Bank of England has ample room to pivot toward rate cuts — another potential headwind for the pound. On this, Bank of England Governor Andrew Bailey testifies to Parliament on Wednesday, following last week’s more dovish 6-3 split to hold rates. Bailey has signaled a ‘gradual easing path,’ hinting at cuts by year end.
Beyond this, the UK data calendar is relatively quiet this week. As such, geopolitical risk will likely dominate, with GBP/USD expected to consolidate within the 1.3400–1.3420 range.
U.S. dollar trading in the upper half of 7-day range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 23-27
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.
