While signs abound that the negotiations between Iran and the US are making progress, the US dollar is holding on to its safe haven gains, and European currencies appear to have trouble taking advantage of the positive investor sentiment.
G10 currencies all moved in a very tight range last week, ending up not far from where they started. Oil prices seem to be taking the peace prospects seriously, falling significantly, which is buoying the currencies of oil-importing emerging countries like South Africa and the Pacific Rim. Meanwhile, US stocks continue to print at record high after record high, while the rest of the world lags somewhat. Even the news that the US had launched fresh missile attacks on south Iran has not derailed risk appetite, as traders instead very much take a glass half full view of the peace negotiations.
This week is fairly light on data, though a couple of inflation reports are more important than usual: the Personal Consumer Expenditures inflation report out of the US on Wednesday and the ECB inflation expectations surveys on Friday. Given the paucity of economic or monetary news we expect the headlines surrounding the US-Iran negotiations to dominate markets. In particular, we will look to see if the euro can improve on its so-far anemic response to the positive peace news.
USD
In contrast to the faltering growth indicators in the European economies, the US economy seems to be mostly ignoring the oil price spike and continues to power along. The May PMIs remained buoyant and above the level of 50 denoting expansion, while high-frequency labour market data, notably weekly initial jobless claims, continues to display resilience. Inflation expectations are clearly drifting higher, however, and it is probably just a matter of time before this is reflected in at least a moderately weaker labour market performance.
All of this is turning Kevin Warsh's original mission of pushing rate cuts through the FOMC into a mission impossible, and markets are starting to price a hike as more likely than a cut for the next Fed move. Economic outperformance and rate support is keeping a lid on the dollar sell off that we would have expected given the positive news about the Iran war.
GBP
Th Labour market indicators out of the UK gave mixed to weak messages last week. In March, wage increases slowed down, unemployment ticked up, and the more advanced April payrolled employees number showed a meaningful contraction, though the three month average remained much better. Inflation data undershot expectations, in a sign that price pressures have yet to spread from the energy complex to the rest of the economy. Far more worrisome was the unexpected plunge in the May PMIs of business activity, in a belated sign that the energy price spike is affecting business confidence.
Overall, this was a pretty weak set of UK economic data and it's surprising that sterling held up as well as it did, particularly now that swaps are not fully pricing in a Bank of England rate hike until September. In the absence of major data this week, focus will be on the latest political news, as the Makerfield by election polls show a close race between PM hopeful Andy Burnham and Nigel Farage’s Reform UK Party.
EUR
Worries about stagflation in the Eurozone increased last week, after the May PMIs of business activity showed another significant retreat further into contraction territory. At best, another quarter of stagnation appears on the way in the second quarter of the year. At worst, we could see an outright contraction - last week’s data has certainly made that an increasingly realistic possibility.
We continue to pencil in two ECB rate increases in 2026, but the outlook beyond the June meeting remains murky as we have as yet little information on the extent to which energy price increases are spreading to the rest of the economy. However, we do note that the rate gap across the Atlantic has stopped shrinking and is now, in fact, trending towards higher relative US rates, which may explain the difficulty the common currency finds in rallying in spite of the optimistic mood in markets.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- CEE FX Outlook - May 2026
- Asia FX Outlook - May 2026
