Dollar Hits 13-Month High on Fed Rate Hike Bets

Sterling slips on Starmer's exit and soft PMIs. The euro holds near one-year lows. The dollar hits a 13-month high on hawkish Fed bets. Risk-off hits hard on Asia, gold, oil, and yen. Central bank speeches to follow. US PCE data lands tomorrow.

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GBP: Politics and PMIs Pull the Pound Lower

GBPUSD 1.3187

The pound fell below 1.3200 against the dollar in early European trade on Wednesday. Keir Starmer's resignation as Prime Minister on Monday injected a fresh layer of political uncertainty, while a run of weak domestic data gave traders further reason to sell.

The UK's flash Composite PMI printed at 49.4 in June, down from 49.7 in May, a 14-month low and the second consecutive month below the 50 contraction threshold. The Manufacturing PMI eased to 53.1 from 53.9, a three-month low. Private sector activity contracted for a second straight month, confirming that domestic demand is losing momentum at an awkward moment.

Bank of England (BoE) Member Alan Taylor described the current environment as "a very uncomfortable and unwelcome place to be," noting that geopolitics is now driving economic outcomes and monetary policy in equal measure. Taylor flagged that the economy entered this period of external shock in a position of excess supply, with a meaningful output gap and weak labour market conditions that he said would act to restrain any second-round wage-price spiral effects. He signalled an "extended hold" as the appropriate response to current inflation pressures, revised the BoE's inflation peak forecast to 3.25% from the April projection of 3.75%, and stated that, in a benign scenario, rates can and should resume their downward path to neutral. He added that a sharper deterioration would require the BoE to cut quickly, with nothing ruled out in a worst-case scenario.

The combination of political transition and contractionary PMI data points to a period of heightened sensitivity to incoming UK data and BoE communication.

His comments reinforce the view that policymakers see growing signs of economic softness. Firms expect inflation pressures to rise, yet wage expectations have not risen in step. That reduces the risk of a wage-price spiral and supports expectations that rates could move lower once inflation risks ease.

Sterling continues to react to a combination of domestic growth concerns, evolving expectations for the Bank of England and broader dollar strength. Upcoming speeches from BoE officials may provide further clarity on the policy path through the second half of the year.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3300 and Support sits at 1.3200

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EUR: Euro at One-Year Lows as the Dollar Dominates

EURGBP 0.8609 | EURUSD 1.1356

The euro traded near 1.1360 against the dollar in the early European session on Wednesday, near one-year lows last seen in April to May 2025. The EUR/GBP pair fell 0.6% on the week to test 10-month lows around 0.8610. The pound is holding its ground better than the single currency in the current risk-off environment.

ECB Chief Economist Philip Lane told the European Parliament committee that the Middle East conflict is weighing on activity, with services bearing the brunt. He noted that profit margins continue to contract and that energy price pressures have not yet filtered through to wages. He argued for caution rather than premature easing. He also flagged continued risks for inflation to hold above the 2% target for some time, despite welcome progress on the Middle East de-escalation.

ECB Vice President Boris Vujcic also confirmed that the neutral rate of interest had not been discussed recently within the Governing Council. This reflects a notable omission given the degree of policy uncertainty in play.

For now, the dollar's strength seems to be the dominant force suppressing the EUR/USD pair. The dollar index (DXY) hit a 13-month high as hawkish Fed repricing pulled capital toward the dollar across the board. That outweighed the ECB's own hawkish posture. EUR/USD's test of one-year lows reflects dollar momentum more than any structural deterioration in the eurozone's own position.

Today brings Germany's IFO Business Climate data for June, covering current assessment and expectations alongside further ECB member speeches, which will be closely watched by investors for any shift in tone around the neutral rate or the pace of future policy adjustment.

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8680 and Support sits at 0.8590

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1500 and Support sits at 1.1380

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USD: Dollar, Markets' Current Preferred Haven

DXY 101.46

The DXY climbed to a fresh 13-month high at 101.46 on Wednesday, driven by a sharp repricing of Federal Reserve (Fed) rate expectations and a broad retreat from risk assets.

June's flash PMI data from the US came in above forecasts. The Manufacturing PMI rose to 55.7 from 55.1 in May, beating the 54.7 consensus. The Services PMI printed at 51.3, up from 50.7 in May and above the 51.0 expected. Strong domestic data reinforced the Fed's hawkish signalling from its latest meeting, where officials left rates unchanged but indicated increasing support for further tightening. New Fed Chair Kevin Warsh reiterated his commitment to restoring price stability.

Traders now price in an 86.1% probability of a Fed rate hike in December, up from 61% before the FOMC meeting last week, according to CME FedWatch data. The probability of a September hike is roughly 70%, up from 29.1% a week earlier. The dollar is drawing support from two directions simultaneously: a hawkish domestic policy pivot and a risk-off environment following a sharp sell-off in global technology stocks, which pushed investors toward government debt and the dollar.

Oil added to the picture. Brent Crude fell below $77 per barrel, extending its monthly decline to around 16.5%. WTI traded around $72.50 after rebounding from three-month lows. An uptick in tanker traffic through the Strait of Hormuz, following the US-Iran ceasefire, eased energy supply fears, though conflicting accounts from Washington and Tehran over the terms of their peace deal, particularly nuclear inspection arrangements and control of the Strait, kept geopolitical risk premiums in play.

Gold fell 0.48% to $4,088.71 per ounce. Higher rate expectations reduced the appeal of non-yielding assets, and gold failed to provide the safe-haven buffer some participants anticipated during the cross-asset sell-off. Silver also declined, as investors trimmed positions to offset losses in equities.

Thursday brings the much-anticipated US core PCE inflation data, the Fed's preferred measure, alongside US Q1 GDP figures. Both releases will be closely watched by investors for clues on the Fed's outlook.

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Other Currencies: Asia Braces as Yen Clings to Lows

USDJPY 161.59 | GBPJPY 213.23 | AUDUSD 0.6912 | NZDUSD 0.5655 | USDCNY ~6.8004 | USDCHF 0.8107

The yen held around 161.5 per dollar on Wednesday, trading in the same range since 2024 and approaching its weakest level since 1986. Verbal intervention from Japanese officials produced little lasting effect. Finance Minister Satsuki Katayama confirmed talks with US Treasury Secretary Scott Bessent this week, with both sides reaffirming a shared commitment to coordinate on foreign exchange if necessary, yet the yen found no meaningful support.

The Bank of Japan's (BoJ) June Summary of Opinions showed policymakers broadly favour continued rate hikes, citing progress in underlying inflation toward the 2% target and still-accommodative financial conditions. The rate differential between the US and Japan remains the dominant structural force keeping the yen under pressure. Friday brings Tokyo CPI data for June, the next scheduled domestic inflation catalyst.

The Australian dollar held near an 11-week low at around $0.6912 after a mixed domestic inflation report. Headline CPI fell 0.7% MoM in May, pulling the annual rate to 4.0% from 4.2%, the slowest pace in three months. Trimmed mean inflation, however, rose 0.4% on the month, above forecasts, lifting the annual core rate to 3.6%. The Reserve Bank of Australia (RBA) left the cash rate unchanged at its most recent meeting after three hikes this year, but retained a tightening bias. The mixed data kept the policy outlook tilted hawkish, with around a 22% probability of an August hike still priced. The Aussie fell 1.2% in the prior session as the global tech-driven equity sell-off hit risk-sensitive currencies hard.

The kiwi fell to a seven-month trough of $0.5660, losing 0.8% in the prior session. Key support now sits at the November 2024 low of $0.5681, a level currently under pressure.

The onshore yuan touched 6.8004 per dollar in morning trade on Wednesday, its weakest level in more than a month, and extended its run to six consecutive sessions of losses against the Greenback. The offshore yuan also slipped to a one-month low. Technical analysis suggests strong export performance has provided structural yuan support through the year, with the currency down only 0.5% against the dollar this month but 2.9% firmer YTD. Near-term pressure from Fed hike expectations is the key headwind; the longer-term export buffer remains intact.

USD/CHF hit a seven-month high of 0.8107 on Wednesday. The Swiss National Bank (SNB) raised its inflation forecast at its most recent meeting and reaffirmed its readiness to intervene in foreign exchange if necessary to curb franc strength. With the dollar on its strongest run in over a year, the SNB's verbal commitment faces a genuine test.

Asian currencies remain sensitive to US rate expectations, risk sentiment, and regional policy developments. Tokyo inflation figures, Chinese economic updates, and further central bank commentary are likely to remain key drivers across the region in the near term.

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Current Rate Table:

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Market Lookahead

Wed, Jun 24

• Germany’s IFO Business Climate and Current Assessment (Jun)

Thurs, Jun 25

• US Personal Consumption Expenditure (PCE) (May)
• US GDP Q1

Fri, Jun 26

• Tokyo CPI (Jun)

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