Oil prices are retreating towards their post-war lows in the hopes that the Strait of Hormuz will fully reopen soon. Unsurprisingly, currencies of energy importing countries, such as the Pacific Rim nations and South Africa, are benefiting the most. The major G10 currencies are still trading in very tight ranges, however, as traders exhibit signs of headline fatigue, while waiting for assurances that the war will not heat back up. All in all, the resiliency of the dollar in the face of the waning risk premia and improving investor sentiment is remarkable.
While the headlines from the US-Iran talks will still drive markets this week, we will also receive several key macroeconomic data points from the US and the Eurozone. We start on Tuesday with the Eurozone flash inflation report for May, followed by the US JOLTS labour market indicator later that afternoon. We'll then get the first read on Q1 Euro Area growth on Friday, and the week will be capped by the key US payrolls report for May. So far it seems that the US economy has been significantly less affected by the energy crisis than European economies, but we will have a more accurate picture by the end of this week.
USD
A slate of second-tier economic reports out of the US last week, including the latest durable goods orders data, largely confirmed the narrative that the US economy remains mostly unaffected by the energy price spike. The only discordant note was a modest downward revision to first quarter GDP growth due to lower consumption expenditure, though investment remains strong. Core PCE inflation, the Fed’s preferred metric, also rose to its highest level since 2023, which could provide further cause for FOMC officials to ditch the bank’s easing bias.
Friday's labour market report is the main economic focus this week. The previous number pointed to unexpected strength in job creation after months of cooling. We expect a number much in line with the previous one, as unemployment remains stable and near full employment levels. Economists are pencilling in a net job creation number around the 100k level, which would be extremely healthy under the circumstances.
GBP
There was little economic data or policy news of note out of the UK last week. The main event affecting the pound was a statement by Andy Burnham, the leading contender for Prime Minister Starmer's position, in which he affirmed his commitment to the UK’s fiscal rules. Nevertheless, the 18th June by-election, which Burnham must win to formally challenge Starmer, remains a key event for sterling. We think that a victory for Burnham here would not only clear his path to Number 10, but open up some downside for the pound given that his preference for greater fiscal expansion would likely entail higher gilt issuance.
This week's focus is, unusually, on the revisions to the PMIs of business activity published earlier in May. These revisions are rarely meaningful enough to move markets, but the negative surprise in the earlier numbers means that a positive bounce back is quite possible this week.
EUR
ECB officials continue to telegraph to markets that an interest rate hike is coming in the June meeting, and despite recent negative growth surprises this remains almost fully priced in by swap markets. Markets expected one additional hike in 2026, and there appears to be very minimal room for further tightening beyond then given the fall in energy prices and recent signs that the US and Iran are inching closer to an agreement to reopen Hormuz.
We would have expected the euro to rally further given the retreat in energy prices and improved investor appetite, but low levels of business confidence and activity, as seen in the PMIs, are hampering the common currency's recovery. Tuesday’s inflation report for May will be closely watched. We don’t think that anything could derail a June hike from the ECB at this stage, although a softer number here could further dampen the possibility of extra hikes beyond this month’s meeting.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FX Update: Labour Leadership Crisis
- Asia FX Outlook - May 2026
