USD: Fed hawkishness overrides geopolitics
US–Iran talks began in Switzerland over the weekend, raising hopes of a lasting end to hostilities and the reopening of the Strait of Hormuz. Both sides described the initial discussions as “encouraging” and signalled a willingness to continue negotiations this week. The talks follow last week’s memorandum of understanding, which lays the groundwork for a more durable peace agreement within the next 60 days, with Iran’s nuclear programme at the centre of the agenda. The ongoing Israel–Lebanon conflict remains a key obstacle to the path to de-escalation, having delayed progress numerous times, including as recently as over the weekend. However, FX markets have grown largely indifferent to back-and-forth geopolitical headlines. Part of this indifference likely stems from uncertainty around what to price next, as persistent uncertainty clouds the outlook, while much of the optimistic outcome may already have been absorbed following weeks of conciliatory rhetoric from both sides.
In contrast, central bank dynamics have moved firmly into focus. A sustained hawkish tilt across major central banks is shaping expectations for a post-conflict environment marked by firmer inflation and elevated policy rates, which reduces the marginal influence of geopolitical developments as markets settle into the new status quo. The dollar has shown greater sensitivity to this shift. The latest Federal Reserve meeting provided a clear catalyst, as a hawkish dot plot combined with Chair Warsh’s emphasis on price stability reinforced the hawkish narrative, sending the DXY 1% higher last week. The broadly positive reaction to Warsh’s press conference further supported the move, easing concerns around policy credibility and increasing confidence in the policy path.
Looking ahead, the Fed’s communication framework may yield fewer incremental signals. Warsh’s preference for limited forward guidance places greater weight on incoming data as the main driver of expectations. In this context, attention turns to this week’s PCE report, which is expected to edge higher and affirm the prevailing narrative. In the near term, the dollar is likely to consolidate following last week’s gains as markets position ahead of the PCE release. An in-line reading should support the current backdrop, though it may not trigger a significant extension given the recent repricing. From a technical perspective, 101 remains the next upside reference, with key supports at 100.50 and 100. The latter, having capped rallies for months, now appears more likely to hold on pullbacks after the Fed-driven breakout.
EUR: Fed dominance pressures EUR/USD
EUR/USD appears to be consolidating near 1.1450, following two days of heavy selloffs last week driven by the Fed’s hawkish tilt. The pair is currently revisiting levels last seen in mid-March, when US–Iran tensions were at their peak.
Rate differentials have begun to exert a stronger influence on FX. Although the US dollar appears better positioned to absorb the hawkish shift, supported by resilient US data, even as oil prices drift lower on improved peace prospects between the US and Iran. On the ECB side, inflation has edged higher since the conflict began in late February, but the broader growth backdrop remains subdued, encouraging a more oil-sensitive policy outlook. In fact, with markets having largely priced out a return to hostilities, oil now influences the euro more directly through rate expectations rather than broader risk sentiment, which had previously provided support. This suggests that further declines in oil prices are likely to limit the extent to which hawkish bets on the ECB can build relative to the Fed, in turn capping euro upside.
In this context, a move back toward 1.16 appears unlikely in the near term. EUR/USD is likely to continue hovering near the 1.15 line, with price action modestly skewed to the downside for this week as the Fed’s hawkish tilt continues to anchor the narrative.
GBP: Sterling downside may be cushioned if the transition is orderly
Sterling came under pressure last week, with the BoE sounding less hawkish than markets had priced. The move was most visible in GBP/USD, where a hawkish Fed amplified the decline toward late-March lows near 1.32, with support holding just above. GBP/EUR also softened, stabilising around the 1.1520 area. Markets have shifted toward a BoE that could remain on hold for the rest of the year, while a sizeable share of the FOMC still leans toward at least one further hike. That divergence could widen further if oil prices continue to ease on reduced tensions around Hormuz.
On the political front, the bar for a negative sterling reaction remains relatively high. Burnham’s victory was well anticipated and largely priced. Focus now turns to how events evolve this week. With Keir Starmer’s allies expecting him to set out a timetable for departure, downside risks for sterling are likely to remain contained. Markets are already familiar with Burnham, and his emphasis on fiscal discipline has helped reassure bond investors. A clearly defined transition would likely be seen as orderly. The downside risk lies in a more chaotic path. If no timetable emerges and attention shifts toward a leadership challenge that could force his departure, heavier pressure on sterling could reappear.
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.
