Euro Eyes Inflation Test While Dollar Awaits Jobs Data

Hot global factory data and fresh Middle East tension lift Sterling to 1.3466 and hold the dollar at 99.15. The euro rallies on expanding PMIs ahead of today's Eurozone inflation figures, while Iran pauses talks with Washington. Upcoming US JOLTS and payrolls data will provide the next directional cues for the greenback.

---

GBP: Cable Defies Geopolitical Friction on Hot PMI

GBPUSD 1.3473 | EURGBP 0.8647

Sterling pushed higher on Tuesday, with the GBP/USD pair trading near 1.3466 after touching the mid-1.3400s earlier in the session. The move came despite lingering uncertainty around developments in the Middle East. It appears that markets largely overlooked reports of incremental diplomatic progress, preferring to wait for clearer signs of a lasting agreement. Investors have become cautious after several rounds of conflicting headlines from the Middle East.

The UK also received a modest boost from manufacturing data. The S&P Global Manufacturing PMI for May rose to 53.9 from 53.7, extending the sector's expansion and reinforcing signs that activity continues to improve. This print marks seven consecutive months of expansion, driven by accelerating production and incoming orders.

The EUR/GBP pair traded near 0.8640 as traders scaled back expectations for aggressive Bank of England (BoE) tightening. Markets currently price around 32 bps of additional tightening this year. That implies a one-quarter-point increase and a smaller probability of a second move before year-end. Domestic growth metrics are soft, but sticky factory gate inflation prevents the central bank from adopting a softer tone.

Geopolitical vulnerability continues to shape the global macro environment. While the US and Iran established a fragile ceasefire in early April, the latest negotiation breakdown reveals a deeper structural rift. Air pocket supply shocks from the Strait of Hormuz are driving input costs higher. British manufacturing output price inflation has accelerated to its second-highest rate in survey history.

Sterling continues to trade within a supportive rate environment, but geopolitical headlines and central bank expectations are driving short-term moves. Market participants are closely monitoring inflation developments across both the UK and the Eurozone for further direction.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3500, 1.3550, 1.3600 and Support sits at 1.3400, 1.3350, 1.3300

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8670, 0.8700, 0.8740 Support sits at 0.8600, 0.8570, 0.8530

---

EUR: Inflation Data Takes Centre Stage

EURUSD 1.1651

The euro gained modest ground, climbing above the 1.1636 handle against the dollar, supported by hawkish central bank commentary and stronger core data.

Manufacturing data offered fresh support. Germany's HCOB Manufacturing PMI rose to 50.1 in May from 49.9 previously, beating the 49.9 flash estimate, moving back into expansion territory. Across the wider Eurozone, Manufacturing PMI improved to 51.6 from 51.4 and exceeded expectations. Attention now turns to the latest Harmonised Index of Consumer Prices (HICP) report, with headline inflation projected to jump to 3.2% YoY from 3.0% in April.

The euro's recent strength reflects a growing belief that the European Central Bank (ECB) may need to maintain a restrictive policy stance for longer. ECB Executive Board member Isabel Schnabel reinforced that view by arguing that inflation pressures linked to the Middle East conflict are spreading beyond energy prices. Her comments signalled concern that inflation expectations could become less anchored if policymakers fail to respond. She stated that policymakers can no longer treat war-induced inflation as a brief, passing shock.

This hawkish stance removes the soft optionality that investors previously priced into the euro curve. Markets currently assign a high probability of further ECB tightening over the coming months. Stronger manufacturing readings add weight to the argument that the region can absorb higher borrowing costs.

Markets now price a 92% probability of a 25 bps rate increase at the June 11 meeting, taking the deposit rate to 2.25%, and a 50% probability of an additional September hike.

The combination of improving economic activity and persistent inflation keeps the euro supported against lower-yielding currencies. Today’s inflation data now carries greater importance for euro pairs. Any upside surprise could reinforce expectations of tighter ECB policy and influence near-term pricing across European currencies.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1650, 1.1700, 1.1750 and Support sits at 1.1580, 1.1520, 1.1450

---

USD: Greenback Steadies as Tehran Pauses Peace Deal Talks

DXY 99.15

The dollar index (DXY) traded near 99.15 as investors adopted a cautious stance ahead of key US employment releases later this week. The Greenback eased slightly after Lebanon announced a local ceasefire between Israel and Hezbollah, but broader regional instability preserves a safe-haven bid.

US domestic data remains robust. The ISM Manufacturing PMI advanced to 54.0 in May from 52.8 in April, marking its fifth month of growth. New orders remained resilient despite disruptions to global trade and rising input costs linked to the Middle East conflict. New Orders led the charge at 56.8, though the sub-index for raw material prices surged to 82.1.

Attention now shifts to the JOLTS job openings report and Friday's non-farm payrolls release. Economists expect US employers to add approximately 85,000 jobs in May, while the unemployment rate is forecast to hold at 4.3%. Lower 10-year Treasury yields at 4.40% are capping dollar gains and lifting spot gold, reducing the opportunity cost of holding non-yielding assets.

The Federal Reserve (Fed) outlook has changed materially over recent weeks. Before tensions escalated in the Middle East, traders largely expected the Fed to ease policy. Rising energy prices and renewed inflation concerns have now altered that view. Markets now see a greater likelihood that the Fed will keep rates elevated for longer. Strong labour market data could reinforce that narrative and support US yields.

Geopolitical uncertainty continues to underpin safe-haven demand for the dollar, limiting downside pressure even when risk sentiment improves. Employment data and Fed commentary remain the key drivers for dollar pairs this week on the economic front. Investors continue to assess whether inflation risks or slowing growth will dominate policy discussions during the second half of the year.

---

Commodity Currencies and the Yen Under Fire

AUDUSD 0.7164 | NZDUSD 0.5936 | USDJPY 159.72 | GBPJPY 214.70

Risk-sensitive assets fell during early trading. The Australian dollar dropped to 0.7164, while the New Zealand dollar slid toward 0.5936. In Asia, the Japanese yen weakened to 159.72 against the dollar, moving within striking distance of the psychological 160 level. This slide occurred despite a direct warning from Japanese Finance Minister Satsuki Katayama, who stated that authorities stand ready to act against speculative, disorderly currency swings.

A lack of verifiable progress in peace negotiations is depressing global risk sentiment, directly bruising the antipodean currencies. Local economic indicators do not seem to provide a strong floor. Australian trade figures reveal a sharp drag on growth, as severe weather disrupted commodity exports while imports of data centre equipment jumped.

An underlying inflation risk persists; the Fair Work Commission announced a 4.75% increase in the minimum wage for the upcoming fiscal year. This decision risks keeping domestic inflation expectations elevated, complicating the Reserve Bank of Australia's (RBA) policy path. Investors have abandoned an active rate hike for this month, but maintain a 50-50 bet for August. For both the Australian and New Zealand dollars, broader risk sentiment and developments in China remain important external drivers.

In Tokyo, the Ministry of Finance confirmed it spent 11.7 trillion yen on currency defence in late April. However, verbal interventions are losing their efficacy. Unless global risk sentiment swings back toward a positive outlook, the dollar-yen pair is likely to maintain upward pressure toward the April high of 160.20. Yield differentials continue to favour the dollar. That keeps upward pressure on the USD/JPY pair despite concerns about intervention.

---

Current Rate Table:

---

Market Lookahead

Tues, June 2

• Eurozone HICP (May)
• US JOLTS job openings (monthly)

Wed, June 3

• Global Composite and Services PMI releases across EU, US, UK
• Eurozone Producer Price Index (May)
• Australia’s Q1 GDP
• GBP BoE monetary policy hearings

Thurs, June 4

• Eurozone retail sales
• US Initial jobless claims
• Australia’s Trade balance

Fri, June 5

• US Unemployment rate (Apr)
• US Average hourly earnings (Apr)
• US Nonfarm payrolls (Apr)
• BoE governor bailey speech

---

Stay Ahead in the Currency Game

Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

---

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

---