US Iran Peace Hopes Rattle the Pound, Euro and the Dollar

Sterling slipped on a 0.1% GDP contraction in April, recovering only partially through the early European session. The euro edged lower despite Thursday's ECB rate hike: its first in nearly three years. The dollar gave background as US-Iran peace signals reduced safe-haven demand, though softer core PPI kept inflation fears in check.

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GBP: Cable Recovers on UK GDP Contraction

GBPUSD 1.3388 | EURGBP 0.8634

The pound recovered a portion of its early losses on Friday, with GBP/USD climbing back to around 1.3410 before settling near 1.3400 through the early European session. The recovery followed the release of UK GDP data, but the data itself did not inspire conviction.

Britain's economy contracted 0.1% in April. That matches forecasts and snaps a run of positive monthly prints following a 0.3% expansion in March. Output across the services sector fell 0.2%, dragged down by administration and support services and arts, recreation and entertainment, according to an ONS official. The cancellation of Formula 1 Grand Prix races and other Gulf sporting events is likely a consequence of the US-Israeli conflict with Iran, delivering a measurable blow to those sub-sectors and related British firms. Manufacturing offered some offset, rising 0.4% on the month, helped in part by pharmaceuticals. The three-month rolling figure to April came in at 0.7% higher than the prior period, broadly as expected.

The UK GDP print lands as the first clear evidence that Middle East instability has filtered into British economic output. The channel was narrow but real: event cancellations, disrupted logistics, and softening sentiment across leisure and hospitality all contributed. It is unlikely to be the last.

Market attention now shifts squarely to next week. The Bank of England's (BoE) monetary policy decision is the dominant event, flanked by UK employment data covering the three months to April and the May Consumer Price Index (CPI). Both wage figures and CPI will carry significant weight as the BoE assesses whether inflation pressures justify holding or moving rates. The EUR/GBP pair held its ground through both the UK and German data releases. Neither print delivered a decisive catalyst for the cross, and it continues to consolidate near 0.8630

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3450 and Support sits at 1.3350

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8700, 0.8660 and Support sits at 0.8590

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EUR: ECB's First Hike in Three Years Sets the Tone

EURUSD 1.1561

The euro steadied below 1.1600 on Friday, easing back from Thursday's sharp rally after the European Central Bank (ECB) raised interest rates for the first time in nearly three years. The EUR/USD pair traded around 1.1574 at its firmest before drifting to 1.1561 as the dollar reclaimed some ground.

The ECB raised its key rate by 25 basis points. ECB President Christine Lagarde described the decision as unanimous and characterised it as a necessary signal rather than a pre-emptive one. The central bank cited the broadening of energy price pressures through the wider economy as the principal justification. Lagarde confirmed the bank reacted to that broadening rather than acting ahead of it. She also noted the mild scenario, the benign base case, is unlikely to materialise. On inflation, she flagged the need to better understand what is driving services inflation to 3.5%, even as second-round wage effects have not yet appeared. Business and public investment should offer some cushioning, she said, as consumption continues to drive growth. Banks across the euro area are resilient, per the statement, though financial stability risks grow the longer the Middle East conflict persists.

The central bank stopped short of offering firm guidance on the pace or extent of further tightening. Markets had already priced two additional hikes by year-end before Thursday's decision. The ECB's reluctance to pre-commit left the path beyond September open. A September follow-up hike is now the working assumption across markets, though Lagarde's deliberately non-committal tone limited the euro's ability to extend through Thursday's gains.

German inflation figures provided the macro backdrop. The revised HICP figure for May landed at 2.7% year-on-year, meeting forecasts. Monthly HICP contracted a marginal 0.1%. The data confirmed the disinflationary trend is progressing, though not fast enough to take pressure off the ECB's rate path discussion.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1620 and Support sits at 1.1500

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USD: PPI Surprise Dulled by Iran Peace Signals

DXY 99.84

The dollar index edged back up to around 99.8 on Friday, retracing a portion of Thursday's substantial losses but lacking the momentum to stage a convincing recovery. Two forces pulled in opposite directions, and neither won cleanly.

US producer prices (PPI) rose more than expected in May. Headline PPI posted its largest annual gain in three and a half years, driven by higher energy costs tied to the Middle East conflict. That print initially put rate-hike expectations back on the table. But the more closely watched core PPI reading, which feeds directly into the Federal Reserve's (Fed) preferred PCE inflation gauge, came in at 4.9% year-on-year, below the 5.4% consensus forecast. The undershoot on core took significant heat out of the inflation narrative. Combined with a sharp fall in oil prices triggered by peace signals from Washington, investors’ inflationary concerns eased through the session.

President Donald Trump said on Thursday that a peace deal with Iran could be signed as soon as this weekend in Europe and that it would reopen the Strait of Hormuz to shipping. However, Iran stated it had not reached a final decision. The divergence between the two positions kept risk appetite unstable. The dollar found its footing in Asian trade as investors questioned whether the deal would materialise at all.

The probability of the Fed keeping rates on hold at its 28 October meeting shifted to 63.3% following the PPI data, up from an even split the day before, per CME FedWatch. Expectations for the next hike have moved to December. Fed Chair Kevin Warsh is set to hold his first major policy appearance next week. A dovish lean from Warsh could shift that timeline, though the data at this juncture sets a high bar for rate cuts. The more likely scenario is that the Fed sits tight and watches.

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Other Currencies: Yen, Aussie, Kiwi, Loonie, Yuan

USDJPY 160.32 | AUDUSD 0.7029 | NZDUSD 0.5814 | GBPJPY 214.83 | USDCNY 6.7656

Japanese Yen

The yen slipped back to around 160.2 per dollar on Friday, surrendering part of Thursday's gains. The Bank of Japan (BoJ) holds its policy meeting next week, and the market expects a 25 basis point rate increase to 1.0%. A level that would represent the highest BoJ rate since 1995. BOJ Governor Kazuo Ueda has been hospitalised and will not chair the June meeting. Japan's vulnerability to Middle East disruptions is structural: the economy is heavily dependent on oil imports from the region, and progress on a peace deal in the Strait of Hormuz carries direct implications for energy costs and thus the rate trajectory. Until a deal is confirmed, the yen's path is likely to remain constrained.

Australian Dollar

The AUD/USD pair held around $0.70 and is on track for a flat weekly close. The Reserve Bank of Australia (RBA) meets on Tuesday. Three rate hikes earlier this year have begun to filter through, and a run of softer data, including GDP, housing prices, and a surprisingly weak April CPI, has brought expectations for further tightening down sharply. The probability of an August hike has fallen from above 80% a month ago to approximately 35%. The May CPI print on 24 June will carry extra weight as policymakers assess whether April's soft reading was a genuine trend or an anomaly.

New Zealand Dollar

The NZD/USD pair slipped to around $0.5820 in the European session. Stronger than expected US PPI data lifted the dollar against the kiwi. The Reserve Bank of New Zealand (RBNZ) has signalled interest rates are likely to rise sooner and higher than previously anticipated; a hawkish tilt that has offered the NZD some structural support even as it softened on the day.

Canadian Dollar

The Canadian dollar touched a seven-month low against the US dollar on Friday as yield differentials widened sharply. The Canadian two-year yield fell as much as 131 basis points below the equivalent US rate, the largest gap since June 2025. The differential reflects diverging central bank paths: the Fed is on hold or tightening, the Bank of Canada (BoC) is pricing a more dovish trajectory. Canadian bond yields fell across the curve, with the 10-year down 7 basis points at 3.427%.

Chinese Yuan

The onshore yuan firmed to 6.7656 per dollar, up around 0.09% on the day. The offshore yuan traded at 6.7665. The yuan is flat against the dollar this month but has gained 3.4% year-to-date, hovering near a three-year-high. The peace deal hopes, reduced demand for the dollar as a safe haven, giving the yuan room to consolidate its recent strength.

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Current Rate Table:

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Market Lookahead

Mon, 15 Jun

• US Industrial Production data (May)

Tues, 16 Jun

• China’s Retail Sales and Industrial Production data (May)
• RBA Monetary Policy meeting, Interest rate decision
• Germany & Eurozone ZEW Economic Sentiment (June)

Wed, 17 Jun

• UK CPI (May)
• UK PPI (May)
• UK Retail Price Index (May)
• Eurozone HICP (May)
• Fed Interest Rate decision, FOMC projections

Thurs, 18 Jun

• UK Average Earnings, Claimant count Change, ILO Unemployment rate
• BoE Monetary policy meeting, Interest Rate decision

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