Dollar gains on solid employment figures and Middle East tensions

USD

The dollar enters this morning's session on a firm footing after Friday's blockbuster nonfarm payrolls. May employment growth of 172k smashed the consensus near 85k and beat every estimate submitted to Bloomberg, with unemployment holding at 4.3% and average hourly earnings up 0.3% MoM. As we noted in Friday's data reactive, the print all but closes the door on the dovish leanings many had attributed to new Fed Chair Warsh, with a 2026 rate hike more than fully priced as of this morning, up from around 60% a week ago. The DXY broke decisively out of its multi-week 99-99.5 range and pushed toward 100 into the New York close, with USDJPY clearing 160 and traders on MoF intervention watch. The story has only hardened over the weekend: Israel and Iran traded direct missile fire on Sunday, the first such exchange since the 8 April ceasefire, and the IDF struck targets in western and central Iran in the early hours of Monday. With Brent up to around $97 and safe-haven flows evident, we expect the dollar to remain bid into Wednesday's pivotal May CPI release, where, as we flagged in our Week Ahead, a firm print would reinforce the dollar-supportive picture.

EUR

EURUSD enters the new week on the back foot, slipping toward 1.15 into Friday's close after sliding from above 1.16 in the immediate aftermath of US payrolls. As we have flagged repeatedly, the asymmetry around Thursday's ECB meeting was already skewed firmly to the downside, with markets near-fully pricing the 25bp hike that we, like consensus, expect Lagarde to deliver. With eurozone May headline inflation at 3.2%, a near three-year high, the immediate decision looks all but locked in, but the bloc's terms-of-trade dynamics tied to a still-closed Strait of Hormuz remain structurally unhelpful for the single currency. The weekend's Iranian missile barrage on Israel, and the subsequent IDF strikes on Iran in the early hours of this morning, are unambiguously negative for the euro — both via the oil channel and the risk premium it reintroduces. April Sentix investor confidence at 09:30 BST is the only notable euro-area release coming up today, leaving the single currency hostage to Middle East headlines and Wednesday's US CPI. We continue to look for EURUSD to grind lower into Thursday's Governing Council meeting.

GBP

Sterling enters Monday's session under pressure, with cable having drifted lower against an emboldened dollar following Friday's US data, and GBPEUR edging marginally lower despite the euro's own difficulties. We continue to think the pound's prospects are unfavourable on most metrics: an unhelpful terms-of-trade dynamic with Hormuz still effectively closed, a labour market that has cooled at the margin, softer recent inflation prints, and persistent political uncertainty surrounding PM Starmer's tenure as Burnham's planned return via the Makerfield by-election keeps the leadership question firmly in view. The domestic calendar is light in the early part of the week, before Thursday brings April's monthly GDP alongside industrial production, manufacturing, and construction output figures. With the BoE not meeting until 18 June, none of this looks set to deliver an immediate policy steer, however, and we suspect cable trades in a tight, dollar- and oil-led range with a downside bias as Middle East tensions weigh on risk appetite.

CAD

The loonie comes into the new week having punched above its weight on Friday, with the loonie outperforming on crosses in the aftermath of a blockbuster Canadian jobs report. May employment surged 87.8k, well above the 10k consensus we flagged on Friday, while unemployment fell three-tenths to 6.6% against expectations for it to hold at 6.9%. Markets have responded by stripping out any residual easing premium ahead of Wednesday's BoC decision, where we continue to expect a hold. That said, the USDCAD response still saw the pair end last week on the up, ending Friday in the mid-1.39s with the fallout from US jobs numbers, and from Middle East tensions, dominating the impact of Canada’s own employment figures. As such, even with Friday's data improvement, we maintain that the balance of risks for CAD remains unfavourable, with the data calendar sparsely populated ahead of the BoC on Wednesday.

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