The dollar remains on top post-FOMC

USD

Thursday belonged to the dollar, the standout of the decisive central-bank week we had previewed. The greenback extended its post-FOMC rally, with the DXY pushing to levels just shy of 101 by the end of the session. Wednesday's hold at 3.50–3.75%, Chair Warsh's debut, landed as the hawkish-leaning outcome we flagged, though the reaction proved larger than the "modest" support we anticipated: the dot plot showed half of the eighteen participants pencilling a 2026 hike, and swaps moved to price a move by the autumn. As we argued immediately after the meeting, that ramp-up in tightening bets looks premature given how fast Fed communication is changing under the new leadership and the still-fluid Middle East backdrop; we lean toward no change. Overnight, Washington and Tehran signed an interim memorandum to begin winding down their nearly four-month conflict, CENTCOM lifted its naval blockade, and the Strait of Hormuz started reopening. Today is quiet: US markets are shut for Juneteenth, leaving thin liquidity. The deal's follow-through, a special election in the UK, and yen intervention risk near 160 to set the tone.

EUR

The single currency spent a second session on the back foot yesterday, easing to multi-day lows in the mid-1.14s as the firmer dollar did the damage; a procession of ECB speakers, President Lagarde among them, left the broader picture unchanged. That extends the move below the 1.15–1.16 band we had expected to hold, with the hawkish Fed proving the dominant force. The fundamentals beneath the euro remain mixed: the ECB is still in hiking mode, and markets lean toward a further increase by September, yet the latest staff projections, seeing 3% average inflation this year against growth cut to 0.8%, underline how little room soft activity leaves the euro to run. Today's domestic diary is again light on data, meaning EURUSD likely stays hostage to the dollar. As we have maintained, the medium-term case is constructive: the signed US–Iran framework and a reopening of the Strait ease the bloc's terms-of-trade squeeze, which should favour euro outperformance in time, even as near-term dollar strength caps immediate upside.

GBP

Sterling remains a laggard. The Bank of England held Bank Rate at 3.75% as universally expected on Thursday, but the devil was in the details of the decision. A 7–2 split scans as hawkish at first glance, but much of the voter commentary skewed dovish relative to May. This, we think, explains part of the pound’s poor showing. But politics has also helped: in the early hours, Andy Burnham won the Makerfield by-election with 55% against Reform's 35%, clearing his path to challenge Keir Starmer's premiership and injecting a fresh dose of leadership uncertainty. This morning's stronger-than-forecast May retail sales, up 1.2%, nudged GBPUSD back toward 1.32, but the lift looks fleeting. With the additional risk premium we think sterling should carry, now compounded by an open leadership contest, we stay bearish in the near term and see EURGBP biased higher, a hiking ECB outscoring a more cautious BoE.

CAD

The loonie weakened again, with USDCAD climbing for a third straight day to break sustainably through 1.41. The driver was oil: WTI slid to around $75, on course for a near-10% weekly loss as shipping conditions through the Strait of Hormuz rapidly improved and the US lifted its maritime restrictions on Iranian ports. This is precisely the scenario we sketched previously - a credible reopening should ease the haven dollar, but loonie upside is capped by softer crude, and here the terms-of-trade drag, allied to broad post-Fed dollar strength, won out. Lingering doubts over USMCA after the President's renegotiation comments add a further headwind. The domestic calendar sees domestic retail sales for April, although the market impact is likely to be modest. That should leave USDCAD to again take its cue from crude's reaction to the reopening of the Strait and any fresh trade or Middle East headlines. With the war premium draining out of oil and the Fed leaning hawkish, we expect USDCAD to hold its gains above 1.40 into the weekend.

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