Sterling shows little sign of stress despite the prospect of an imminent change in prime minister. This points to stronger market trust in Burnham, but also leaves the currency more exposed if fiscal concerns resurface. Elsewhere, Fedspeak and Strait of Hormuz news should drive most FX moves this week. Risks remain slightly skewed to the upside for USD.
USD: Eyes on Fedspeak and Hormuz
We expect the two main drivers for the dollar this week to be Fedspeak and news on whether Strait of Hormuz flows have continued.
The former will shed some light on how serious FOMC members are about the prospect of one or more rate hikes after a hawkish meeting last week. We’ll be particularly curious to hear whether the half of the FOMC that didn’t forecast a hike this year has an interest in pushing back against the 43bp of tightening priced in by December. In this quieter period of the month for data releases, Fedspeak should be the main trigger for any adjustments in front-end USD rates, which have been the single most important driver of USD of late. The main data points this week are May personal spending, expected to be robust, and core PCE, which we expect at 0.3% month-on-month – both due on Thursday.
On geopolitics and commodities, markets are holding on to optimism following signs of progress towards a final deal. In recent days, US President Donald Trump has again threatened to strike Iran amid renewed Israel-Hezbollah clashes. Iran claimed it had shut the Strait of Hormuz in response, but shipping data and military sources suggest oil flows have continued.
For now, our dollar call remains unchanged. Near-term risks remain skewed to the upside, but we do not see last week as the start of a new strong dollar cycle. Markets may try to use the next data or Fedspeak catalyst to price in 50bp of Fed tightening in 2026, but unless there is a fresh Middle East escalation, lower oil prices should contain USD gains. The DXY rally may fall short of the May 2025 102.0 high.
EUR: 1.140 can be tested soon
In line with our USD view above, we see a decent risk that EUR/USD will have to test 1.140 on the back of a long tail of post-Fed USD momentum before re-entering any upward pattern. At the same time, positive headlines from the US-Iran negotiations suggest the depth of the next leg lower should be more limited; the commodity terms of trade for the eurozone have recovered more than half of the initial war-related drop.
On the data side, we’ll see eurozone confidence data and PMIs today and tomorrow. Still, the surveys may not yet reflect the interim peace deal and could still signal a less optimistic mood. We don’t expect those to be a key driver of EUR/USD, which remains very heavily dominated by the USD leg.
GBP: Sterling seemingly fine with potential change in PM
Multiple media reports (and a post by President Trump) have indicated UK Prime Minister Keir Starmer is set to lay out his exit plan this week – quite possibly today. That follows a number of calls by cabinet members asking for his resignation. There appears to be little doubt at this stage that Manchester Mayor Andy Burnham would, in turn, become the new PM.
In May, Burnham’s comments about fiscal rules triggered a GBP and gilt selloff. Since then, he has adopted a more market-friendly tone on budget plans, resulting in a very contained market reaction to his winning a parliamentary seat last week, which allows him to become PM. The key test now for markets is the choice of Chancellor. Incumbent Chancellor Rachel Reeves has successfully mitigated market concerns via a strong commitment to the fiscal rule – markets will search for similar reassurances from her successor.
Our short-term fair value model shows no overvaluation in EUR/GBP, suggesting no political risk premium. That is good and bad news for GBP. It signals that markets are relaxed about this government change, but that means a greater downside for the pound should fiscal concerns resurface.
Our view on EUR/GBP is generally bullish, but mostly because we don’t expect the Bank of England to hike rates despite 33bp priced in. The past couple of years suggest that political risk premium can emerge in GBP, but tends to be temporary.
CEE: FX is getting moving
The week will open with Polish retail sales, wages and PPI figures for May. The market in Poland has jumped on the wave of dovish comments from several MPCs in the last two weeks and has outpriced almost all rate hikes this year. Friday's industrial production figures for May showed some upside, and the market has returned to expectations of less than one hike. Today's figures could confirm or refute whether rate hikes will be needed in market calculations.
Tomorrow, the National Bank of Hungary is likely to cut rates by 25bp to 6.00%. The central bank wanted to restart the cutting cycle in February (when it last cut rates), but the US-Iran conflict stopped the process. However, the general election in April brought a strengthening of the forint by about 6% versus the euro, and inflation has since surprised on the downside at 1.8% in May, the lowest in the CEE region. The central bank will present a new forecast, which should revise the inflation forecast downwards, and the market's attention will be on communicating how many rate cuts we can expect this year. Our forecast expects 75bp this year with upside risk, but we expect the market to go for more.
The CEE FX market is dominated by a stronger US dollar, similar to the rest of the EM space, following last week's Fed meeting. We have seen some pressure on currencies in the region in recent days. EUR/PLN jumped above 4.260, and for the first time since early April, it has broken out of its usual ranges. For now, the rate differential suggests fair levels in our opinion, but today's data may decide the direction moving forwards. EUR/HUF saw a minor correction upwards after touching 350, and the NBH meeting creates additional upside risk. On the other hand, 355-356 levels could again attract new forint buyers.
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