The dollar makes fresh highs ahead of PCE tomorrow

USD

The dollar extended its post-FOMC ascent on Tuesday, the DXY climbing around 0.4% to a fresh one-year high near 101.4. June flash S&P Global PMIs did little to dent the bid: the manufacturing gauge jumped to 55.7, its best since May 2022, though softer employment components capped the upside. As we have argued since Chair Warsh's debut, the greenback's strength owes more to the hawkish reading of his stripped-back communication than to the incoming data. Middle East headlines stayed two-sided: Washington's 60-day oil sanctions waiver and recovering Strait of Hormuz traffic dragged crude to three-month lows, yet Iran's parliament speaker insisted the waterway "will never" return to pre-war norms, and Lebanon remains a flashpoint. Today's slate is light, with May new-home sales the only domestic release, leaving Middle East developments and USDJPY intervention risk to set the early tone before Thursday's core PCE — the week's marquee event. Swaps now near-fully price a September hike, with roughly half the FOMC pencilling a 2026 move. We continue to view that repricing as premature and lean towards no change.

EUR

The euro stayed firmly on the back foot, EURUSD shedding around 0.4% to close below 1.14, its weakest since June 2025. Broad dollar strength did most of the damage, but the domestic picture was mixed. June flash PMIs offered a glimmer: the composite rose to 49.5 from 48.5, beating consensus, services improved to 48.9, while input and output prices eased as lower energy costs fed through. As we flagged ahead of the week, cooling prices had scope to nudge sentiment higher, and they did. Yet this was no recovery: new orders fell for a fourth straight month, and Germany's composite slid to an 18-month low of 48.0. The single currency continues to wear the energy and shipping disruption stemming from the conflict, even as the June 17th US-Iran memorandum and reopened Hormuz flows promise some relief. Today brings the June IFO survey at 09:30 BST, the week's main test of how German business is weathering the shock. We retain a modestly constructive medium-term view, predicated on a durably reopened strait easing the terms-of-trade squeeze. Still, Lebanon's flare-ups and Tehran's brinkmanship over the waterway keep us wary of turning outright bullish.

GBP

Sterling was left in limbo on Tuesday, tracking the euro in many respects. Cable fell roughly 0.4%, slipping back below 1.32 as June flash PMIs underlined a darkening domestic backdrop, though this only served to match the single currency’s decline throughout the day. That, to us, is a little surprising – we think the UK numbers are unambiguously weaker than those on the continent. The composite eased to 49.4, a 14-month low, but the damage was in services, where activity dropped to 48.7, the sharpest contraction in 41 months, with respondents blaming both the Middle East war and political uncertainty. On that score, politics will likely remain the dominant sterling driver into the end of the week. With Andy Burnham the clear frontrunner to succeed Starmer and betting markets still favouring Wes Streeting as Chancellor, a name we noted markets would welcome, sterling's immediate path now hinges on an orderly transition and swift fiscal continuity. We continue to see medium-term risks tilted lower: a smaller political risk premium could lend support. Still, it cannot offset deteriorating services demand, and unless that demand recovers quickly, the relative growth signal still argues for further GBPEUR downside.

CAD

The loonie was hit by another blow on Tuesday, weakening around 0.4% as USDCAD pushed above 1.42 for the first time since April 2025. The move came despite Monday's firm May CPI, which saw headline price growth of 3.2% YoY. Even so, Governor Macklem downplayed any signs of strength yesterday, further exacerbating recent loonie weakness. His comments suggested that recent Middle East developments had partially reduced the policy “dilemma” facing the central bank, while May inflation roughly aligned with the central bank’s 3% expectation. With no major domestic data today, further remarks from Bank of Canada officials, including Senior Deputy Governor Rogers, oil, and broad risk sentiment will steer the pair. Markets now price a 50% chance of a single BoC hike by December; we think that is premature and stay cautious on the loonie, mindful of the USMCA overhang that Governor Macklem continues to flag. Having cleared 1.42, we expect USDCAD to remain elevated in the near term.

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