A choppy dollar, but little change

USD

The dollar traded choppy on Wednesday but ultimately ended flat. May CPI landed broadly as we had anticipated, with headline inflation rising 0.5% MoM to 4.2% YoY, the highest since April 2023, with energy accounting for over 60% of the gain given continued disruption to shipping via the Strait of Hormuz. Crucially, core prices rose just 0.2% MoM, modestly undershooting expectations, close to a best-case print in our view, buying Chair Warsh breathing room and seeing the DXY initially slip back mid-afternoon. Geopolitics quickly reasserted itself, however, with renewed US strikes on Iranian targets lifting Brent into the and leaving the DXY once again knocking on the door of 100 this morning. Today brings May PPI and weekly jobless claims at 13:30 BST, the final inflation read before next week's FOMC meeting, and the first under Chair Warsh. Markets continue to fully price a 2026 hike, and a hot pipeline print should harden that view. As such, we still see the path of least resistance for the buck pointing upward in the short term.

EUR

EURUSD spent Wednesday treading water in the mid-1.15s, with the soft US core print offering only fleeting relief before renewed Middle East risk aversion capped the pair, where it remains this morning. Attention now turns squarely to today's Governing Council decision at 13:15 BST, followed by President Lagarde's press conference. Markets fully price a 25bp hike, meaning the decision itself should be a non-event, with guidance instead key for traders. Our sense is that euro risks skew asymmetrically to the downside, with the ECB unlikely to deliver a further two rate hikes, albeit the most likely outcome for the single currency is little change, given Lagarde’s tendency to offer minimal steer to markets. Still, the bloc's terms-of-trade exposure to a still-closed Strait of Hormuz means tightening into an energy shock carries real growth costs, and any recognition of this by Lagarde could see EURUSD grind lower into the back end of the week.

GBP

Sterling once again played the passenger on Wednesday, with cable oscillating in the high-1.33s on dollar swings and the euro cross going nowhere. The domestic calendar is once again empty today. April GDP, alongside industrial production and trade figures, lands tomorrow morning at 7:00 BST. With the BoE not meeting until June 18th, sterling should therefore trade off external forces for another session, with the ECB decision, US PPI, and Middle East headlines the likely drivers. We continue to look for cable to hold a tight, dollar- and oil-led range with a downside bias.

CAD

As we and markets expected, the Bank of Canada held its policy rate at 2.25% on Wednesday, a fifth consecutive decision to leave rates unchanged. The messaging leaned cautious: Macklem framed economic weakness combined with rising inflation as a dilemma for monetary policy, with the unchanged rate balancing those risks. The market reaction was suitably muted; the loonie briefly spiked before quickly erasing gains, leaving USDCAD in the mid-1.39s this morning, just shy of Tuesday's peak. With the Canadian calendar bare today and the next decision not until July 15th, US PPI and Middle East developments should dominate. Firmer crude offers marginal support, but with the broad dollar bid, we continue to see the balance of risks for CAD as unfavourable, and a test of 1.40 cannot be ruled out into next week's FOMC.

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