The week, explained.

The week's move was largely a story of the dollar rediscovering its footing after a brief wobble. Fed Governor John Williams' comments from 25 June continued to reverberate: he pushed the Fed's 2% inflation target back to 2027-28 and flagged US inflation could still be running at 3.5% in 2026. That kept Fed funds futures firmly hawkish — markets are pricing roughly 84% odds of a rate hold at the 29 July meeting and still see nearly 40 basis points of net tightening through mid-2027. Higher-for-longer US rates make dollar-denominated assets more attractive, and that structural bid underpinned the greenback all week.

The PCE inflation print (the Fed's preferred gauge) released on 25 June came in broadly firm, which initially gave the dollar some pause — 'good news for the economy can be bad for the dollar if it's already priced.' But once the dust settled, the hawkish rate path reasserted itself and EUR/USD was pushed back toward the week's lows near 1.1325.

The euro had precious little in the way of fresh catalysts. ECB President Lagarde and her colleagues were largely quiet this week, leaving traders with no new guidance on European rate policy to trade against. Without a countervailing story from Frankfurt, the euro was left at the mercy of dollar flows.

Geopolitical noise — Iran-US tensions in the Strait of Hormuz, renewed Israeli strikes in Lebanon testing a fragile ceasefire, and uncertainty around USMCA trade renewal — added a layer of caution to risk appetite. That broadly supported the dollar as a safe-haven currency, though the moves were modest rather than dramatic.

It was a near-flat week for Cable, but the calm close masks some intra-week turbulence. The pair briefly pushed above 1.3270 before retreating, with the broad tone set by a geopolitical backdrop that refused to settle. US airstrikes on Iran extended into a second day, and warnings from Tehran over navigation in the Strait of Hormuz — through which roughly a fifth of the world's seaborne oil passes — kept risk appetite cautious without triggering a full-blown flight to safety.

On the US dollar side, the fundamental picture remains hawkish. Fed Funds futures continue to price roughly 35 basis points of net tightening through to mid-2027, meaning markets expect the Federal Reserve to hold rates higher for longer. That supports the dollar in theory, but because this view is now well-established consensus, it offers diminishing extra firepower for USD bulls — the hawkish news is largely in the price.

For sterling, the week was notably quiet on home-grown catalysts. There were no Bank of England decisions, no major UK inflation prints, and no fresh MPC commentary to shift the dial. That left GBP trading almost entirely on the dollar's mood and global risk sentiment, with the VIX (a gauge of equity market fear) sitting at a relatively relaxed 18.9.

One structural detail worth noting: speculative positioning in sterling remains at a two-year extreme on the short side — meaning a large number of market participants have already bet against the pound. Crowded short positions can unwind sharply if sentiment shifts, which is a quiet but real underpinning for GBP should positive catalysts emerge in the weeks ahead.

The story this week was almost entirely made in Washington. Kevin Warsh chaired his first Federal Open Market Committee meeting and wasted no time making his mark. The Fed's updated 'dot plot' — the chart showing where policymakers expect interest rates to go — was revised meaningfully higher, with the median end-2026 target jumping to roughly 3.8% from 3.4% in March. Warsh scrapped the committee's dovish forward-guidance language entirely and flagged inflation running 'well ahead' of the 2% target. Markets listened: Fed Funds futures now price an 86% probability of a July rate hike, a dramatic repricing that sent the dollar broadly higher.

The euro had little to offer in defence. The European Central Bank under President Lagarde has been in easing mode, and there was no fresh catalyst from the eurozone data calendar to push ECB rate expectations higher and close the growing gap with the Fed. When one central bank is raising rates and the other is cutting them, the currency of the rate-raiser tends to strengthen — that dynamic drove this week's move.

Geopolitics added background noise without changing the fundamental picture. Iran–US nuclear talks in Switzerland ended messily, with the Iranian delegation walking out after remarks from President Trump. Separately, tensions persisted around Lebanon and the Strait of Hormuz. None of this offered the euro meaningful support, though any genuine de-escalation on the Ukraine–Russia front — which continues slowly — remains a modest structural positive for the single currency given Europe's proximity to the conflict.

For now, the rate-path divergence between the Fed and the ECB is the dominant driver, and it moved firmly in the dollar's favour this week.

The pound was blindsided on Sunday when Donald Trump publicly declared that Keir Starmer was set to step down as Prime Minister, triggering an immediate wave of political uncertainty that hung over sterling for the entire week. Reports quickly circulated that Rachel Reeves could also lose the chancellorship under a potential Andy Burnham-led government, raising serious questions about the fiscal path ahead. Political instability is a classic GBP depressant — markets hate uncertainty about who controls the budget — and this week was no exception.

On the other side of the pair, the dollar found support from a stubbornly hawkish repricing of Federal Reserve expectations. Fed Funds futures are now pricing around 51 basis points of net tightening through mid-2027, meaning traders increasingly believe the Fed will hold rates higher for longer rather than cutting aggressively. That is a meaningful tailwind for the greenback, squeezing pairs like cable from both ends.

Geopolitical noise added to the risk-off mood. US–Iran nuclear talks in Switzerland broke down dramatically mid-week after Trump made threatening remarks, with the Iranian delegation walking out. Tensions around the Strait of Hormuz — a critical oil shipping chokepoint — briefly flared, dampening broader risk appetite and further undermining a pound that was already on the back foot.

The sell-off did touch a low near 1.3163 before stabilising slightly. Worth noting: speculative traders were already sitting on a fairly sizeable net short position in GBP going into this move, which limits how much further one-way momentum can build — a crowded short is always vulnerable to a snap reversal. UK flash PMI data and US core PCE inflation figures, both due shortly, will be the next big tests for the pair.

The euro gave back modest ground this week as the dollar retained a hawkish undertone, with Goldman Sachs's chief economist Jan Hatzius abandoning his call for a Federal Reserve rate cut in December and instead pencilling in further Fed tightening stretching into 2027. Fed funds futures (ZQ contracts) now price roughly 48 basis points of net Fed tightening through April 2027 — a meaningful shift that widens the interest-rate differential in the dollar's favour, since higher US rates relative to the eurozone make dollar-denominated assets more attractive.

The euro wasn't without support. Markets continued to price ECB rate hikes into the picture, which kept EUR/USD from a sharper sell-off and helped the pair hold above 1.1500. That tug-of-war between a more hawkish Fed and still-elevated ECB expectations is the central tension keeping the pair in a relatively contained range rather than trending decisively in either direction.

Geopolitics added a layer of anxiety. Israeli strikes on Beirut, pointed rhetoric from Iran's military command, and Donald Trump's comments casting doubt on any Iran nuclear deal all stoked risk-off sentiment — the kind of environment where investors typically favour the safe-haven dollar over the euro. Separately, the G7 summit opened amid street protests, adding to the broader mood of uncertainty.

The pair now awaits two key catalysts: the US CPI print on 10 June and the first FOMC meeting chaired by Kevin Warsh on 17 June. Until those events clarify the Fed's true trajectory, EUR/USD looks likely to remain caught between these competing forces.

The week's action was driven more by what investors feared than what actually arrived. All eyes were fixed on Friday's US May CPI print, where consensus expected headline inflation to breach 4% year-on-year — a level that would vindicate the Federal Reserve's cautious stance and add weight to Fed Funds futures already pricing in a 64% probability of a July rate hike. Markets positioned defensively ahead of that number, offering the dollar quiet but persistent support throughout the week.

On the sterling side, the picture was equally uninspiring. UK GDP for April came in at a forecast -0.1% month-on-month, confirming the British economy lost a little momentum heading into summer. The Bank of England offered no fresh hawkish signals to offset that softness, and political noise — speculation around further Starmer government tax rises and fresh civil unrest in Belfast — added a low-grade drag on sentiment towards the pound.

Geopolitical headlines provided colour rather than direction. Reports of a near-finalised US-Iran nuclear agreement, Trump's G7 attendance, and talk of Witkoff and Kushner heading to Moscow briefly lifted broader risk appetite, nudging cable to its weekly high of 1.3483 mid-week before the dollar regained its footing.

One key caveat for dollar bulls: CFTC data shows net short positions on sterling are near a one-year extreme, sitting at roughly the 80th percentile. That kind of crowded positioning means any upside dollar surprise could quickly reverse — not because the fundamentals change, but because squeezed shorts are forced to cover rapidly.

The euro's recent run higher hit a wall this week, with EUR/USD shedding over a cent as markets reassessed the relative pace of rate hikes on both sides of the Atlantic. Fed Funds futures now price roughly 31 basis points of net tightening through April 2027, with a coin-flip chance of a move as soon as 17 June. That is not a lot of tightening in absolute terms, but the mere possibility of the Fed acting again was enough to put a floor under the dollar.

On the European side, the picture is hardly weak. Eurozone core inflation — which strips out food and energy — came in at 2.5%, a touch above the 2.4% expected, and ECB Governing Council member Olli Rehn all but confirmed a June 'insurance' rate rise is fully baked in. Yet here lies the problem for EUR/USD bulls: both central banks are hiking, so the rate advantage that had been lifting the euro is getting harder to exploit. When both legs of a currency pair are tightening, the differential — the gap that really moves exchange rates — compresses and the trade loses conviction.

Geopolitical noise added a safe-haven bid for the greenback. Iran launched missile strikes against Israel on Sunday, halting flights at Tehran's main airport and prompting warnings of a 'crushing response' to any Israeli counter-move. In moments of acute uncertainty, traders tend to reach for the dollar as the world's reserve currency, and this week was no exception.

With euro positioning sitting near the middle of its historical range (the 43rd percentile — meaning speculators are neither especially long nor short), there is no obvious crowded trade to unwind. The pair looks likely to remain choppy: strong European data argues against a sharp fall, but a Fed that refuses to stand down limits meaningful upside too.

The pound had a muted but negative week, drifting lower as the fundamental picture on both legs remained muddy. Bank of England Governor Andrew Bailey set the tone early, acknowledging an uncomfortable stagflationary bind: UK inflation is running above target — largely blamed on the Gulf energy shock — yet the growth outlook has been downgraded, stopping just short of recession territory. That "slower, not collapsing" framing gave the BoE no obvious excuse to cut rates, but equally no clear mandate to hike aggressively. The result was a central bank stuck in the middle, and a pound with little rate-differential appeal.

Across the Atlantic, the dollar found quiet support from stubborn Fed pricing. Markets are currently assigning roughly a 50% chance of a Federal Reserve interest-rate hike by the June FOMC meeting, with futures implying around 31 basis points of net tightening priced through to April 2027. When both central banks lean hawkish, the rate-differential edge that normally drives a currency pair disappears — and cable trades on sentiment instead.

Sentiment, unfortunately, was not sterling's friend either. Geopolitical noise dominated the weekend headlines, with UK Foreign Secretary Cooper publicly calling on Iran and Israel to exercise restraint, and European leaders pressing Putin for an immediate ceasefire in Ukraine. Renewed Middle East tension kept risk appetite cautious and oil prices uncertain — the very energy-price volatility that is complicating the BoE's inflation calculus in the first place.

With CFTC data showing leveraged funds only modestly short the pound — nothing like the extreme positioning that can trigger sharp reversals — there was no technical snap-back to rescue sterling. The pair looks set to take its next cue from the US non-farm payrolls report and any further signals from Bailey, with direction genuinely hard to call until the data speaks.