All eyes on Chair Warsh and the Fed
USD slipped as US–Iran optimism tempered safe-haven demand, with focus on Chair Warsh’s first FOMC and a likely hawkish-leaning hold. EURUSD seen consolidating, while sterling weakens after softer CPI.
USD
The dollar's round trip extended into Tuesday, with the dollar slipping back as US–Iran optimism continued to drive price action. That said, a framework to extend the ceasefire and reopen the Strait of Hormuz remains a deal to do a deal: the text is unpublished, the Strait stays shut, and hostilities grind on, leaving safe-haven demand only partially unwound. Granted, oil continued to slip lower, but equities paused after a three-day rally, while the BoJ's hike to 1%, its highest since 1995, left USDJPY either side of 160 and intervention talk alive. Today, focus swings to Chair Warsh's first FOMC at 19:00 BST, where a hold at 3.50–3.75% is near-certain, so the dot plot, fresh projections, and any move away from an easing bias are what matter. We look for a hawkish-leaning hold, offering some modest dollar support.
EUR
After a soft start, the single currency edged back toward 1.16 yesterday, helped by ZEW survey readings and a softening dollar. ECB commentary remained cautious, with Council members warning that a peace deal would not quickly ease inflation, consistent with new projections pencilling 3% average inflation this year against growth cut to 0.8%. Today's diary is light, with final May HICP the only release, so EURUSD stays hostage to Warsh's Fed tonight, Friday's planned signing, and the G7. As we have argued, the medium-term case is constructive: a signed deal that reopens the Strait and eases the bloc's terms-of-trade squeeze would argue for euro outperformance in time. But for now, we expect EURUSD to consolidate in a 1.15–1.16 range, soft growth capping how far the euro can run.
GBP
Sterling continues to underperform, making only marginal gains against the dollar on Tuesday and slipping back versus the euro. The government remains in disarray with focus on Thursday's Makerfield by-election, where Greater Manchester mayor Andy Burnham is strongly favoured; a win would clear his path to challenge Keir Starmer's premiership. May CPI has just landed this morning to compound the downside pressure. Headline CPI rose 2.8% in the year to May, 0.2pp below expectations, while core CPI also delivered a one-tenth miss, increasing just 2.6% YoY. Granted, this softness was tempered by a fractionally stronger-than-expected services print. Nevertheless, the data does little to alter the picture for the BoE on Thursday, where a hold is overwhelmingly expected. More importantly, the MPC should continue to look dovish beside a hiking ECB. Combined with the additional risk premium that we think should be weighing on sterling, this leaves us bearish on the short-term prospects for the pound ahead of tomorrow’s Bank Rate decision.
CAD
USDCAD stabilised around the 1.40 mark yesterday, again caught between terms of trade and risk conditions. A light calendar again offered few domestic catalysts, a pattern that is set to continue today. Indeed, we think the near-term path for USDCAD hinges on any US-Iran deal and today’s Fed rate decision. A credible reopening of the Strait would likely take USDCAD lower, albeit with loonie upside capped by softer oil, whereas any unravelling before Friday's signing would revive the haven dollar and put a sustained break above 1.40 back in view. But absent any new Middle East developments, a hold from the Fed tonight, accompanied by a modest hawkish tilt in guidance, should ensure that USDCAD keeps probing 1.40 until a US-Iran deal is signed.