The dollar eases at the margin ahead of US CPI tomorrow
Strong US data and geopolitical tensions briefly lift the dollar, with focus shifting to CPI
USD
The dollar's blistering start to the week lost some momentum on Monday. Friday's blockbuster payrolls, which saw May employment up 172k against a consensus near 85k, alongside unemployment at 4.3%, had driven the DXY out of its multi-week 99–99.5 range and toward 100, taking USDJPY clear of 160. As we argued in Friday's data reactive, the print leaves new Chair Warsh little room to lean dovish, and a 2026 Fed hike is now all but fully priced up from around 60% a week ago. A weekend escalation, seeing Israel and Iran exchange missile fires, initially lent a safe-haven bid too. But with Tehran signalling yesterday that it had concluded its operation, Brent slipped, and the buck eased to a session low. With Tuesday's calendar thin, attention turns to Wednesday's May CPI, where, as flagged in our Week Ahead, a firm energy-led print would reinforce the dollar-supportive picture.
EUR
EURUSD steadied just above 1.15 on Monday, having slid from above 1.16 in the immediate aftermath of US payrolls. The weekend's missile exchange between Israel and Iran is unambiguously negative for the euro, via both the oil channel and the risk premium it revives, with the Strait of Hormuz still effectively shut. Tuesday's euro-area docket is bare following Monday's Sentix release, leaving the single currency hostage to Middle East headlines and Wednesday's US CPI. We continue to look for EURUSD to grind lower into the Governing Council meeting later this week. Looking at current market pricing, risks around Thursday's ECB meeting appear asymmetrically skewed toward a weaker euro in our eyes. Markets near-fully pricing a 25bp hike that we, like consensus, expect Lagarde to deliver, but some are now positioned for as many as three increases this year. That, we think, is unlikely, given downside growth implications – recognition of this by Lagarde later in the week poses downside EURUSD risks.
GBP
Sterling stayed on the back foot on Monday, with cable hovering in the mid-1.33s against an emboldened dollar, and edging lower on the euro cross. We continue to see the pound's prospects as unfavourable on most metrics: an unhelpful terms-of-trade dynamic with Hormuz still closed, a labour market that has cooled markedly, softer recent inflation, and persistent political uncertainty around PM Starmer. This sense of weakness was only reinforced yesterday by the REC report on jobs, which added further evidence that the labour market is slowing. But aside from that, the early-week calendar is light before Thursday brings April's monthly GDP alongside industrial, manufacturing, and construction output and the trade balance. With the BoE not meeting until June 18th, none of this looks set to deliver an immediate policy steer. We therefore suspect cable trades a tight, dollar- and oil-led range with a downside bias, as the fragile Middle East truce and a still-shut Strait of Hormuz keep risk appetite and energy prices in the driving seat.
CAD
The loonie punched above its weight on Friday, outperforming on the crosses after a blockbuster jobs report which saw employment surge 87.8k against a 10k consensus, while unemployment fell three-tenths to 6.6%. That has seen markets strip out any residual easing premium ahead of Wednesday's Bank of Canada decision, where we, like the market, continue to expect a hold at 2.25%. Even so, USDCAD ended Friday in the mid-1.39s, holding around these levels on Monday as the fallout from US payrolls and Middle East tensions dominated Canada's own data. Tuesday's docket is sparse ahead of the BoC, an MPR meeting at which the updated forecasts and Governor Macklem's tone. With Wednesday also delivering US CPI, and the Hormuz situation unresolved, we maintain that the balance of risks for CAD remains unfavourable.