Last week was dominated by strong US economic data, which boosted the US dollar and weighed on both the euro and pound. Markets focused on US manufacturing figures, Nonfarm Payrolls, and Eurozone GDP data, all of which reinforced expectations that US interest rates could remain higher for longer.

Last week:

US Dollar (USD)

The US dollar strengthened significantly last week, supported by a series of strong economic releases. Manufacturing data published on 1 June showed that US factory activity expanded faster than expected, signalling continued resilience in the world’s largest economy.

This momentum was continued on 5 June when Nonfarm Payrolls revealed the US added substantially more jobs than forecast. The combination of stronger growth and a robust labour market led investors to scale back expectations of Federal Reserve interest rate cuts, increasing demand for the dollar and pushing it higher against most major currencies.

Euro (EUR)

The euro came under pressure last week as investors focused on weaker economic growth across the Eurozone. Revised GDP figures released on 5 June indicated that the region’s economy expanded more slowly than previously estimated, reinforcing concerns about sluggish growth.

At the same time, stronger US economic data widened the contrast between the Eurozone and the United States, encouraging investors to favour dollar-denominated assets. As a result, the euro weakened against the dollar throughout the week.

British Pound (GBP)

The pound experienced a relatively subdued week but ultimately lost ground against the US dollar. Unlike the US and Eurozone, there were no major UK economic releases driving sterling’s performance. Instead, the pound was largely influenced by developments abroad.

Strong US manufacturing and employment data boosted expectations that US interest rates will remain higher for longer, increasing the attractiveness of the dollar relative to the pound. As a result, sterling softened against the dollar despite otherwise stable domestic conditions.

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While economic data remained the primary driver of currency markets, geopolitical tensions in the Middle East and ongoing UK political uncertainty also influenced investor sentiment. Safe-haven demand linked to developments involving Iran provided additional support for the US dollar, while concerns surrounding the UK’s political outlook weighed modestly on sterling.

Three Key Events to Watch Next Week

1. US Consumer Price Index (CPI) – Wednesday

This is likely to be the most important release of the week for currency markets. After stronger-than-expected US payrolls and manufacturing data, traders will be watching inflation closely to determine whether the Federal Reserve may need to keep interest rates higher for longer.

A higher-than-expected CPI reading would likely support the US dollar, while a softer reading could weaken it.

2. European Central Bank (ECB) Interest Rate Decision – Thursday

Markets are widely expecting the ECB to raise rates by 0.25%. However, the real focus will be on President Christine Lagarde’s guidance for future meetings. If the ECB signals further rate hikes due to inflation concerns, the euro could strengthen.

If policymakers appear concerned about slowing growth, the euro may come under pressure.

3. Middle East Developments and Energy Prices

Beyond economic data, markets remain highly sensitive to developments involving Iran and energy supply routes. Any escalation could push oil prices higher, raising inflation concerns globally and increasing demand for safe-haven currencies such as the US dollar.

Conversely, signs of de-escalation could support risk-sensitive currencies and reduce demand for the dollar.

This week’s outlook:

This week’s FX markets are likely to be driven by US inflation, the ECB rate decision, and geopolitical developments in the Middle East, all of which could have a significant impact on expectations for future interest rates and currency valuations.

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