Foreign Exchange Analysis - 23 June 2025

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GB Pound

What happened last week?

It was an uneventful week for the Pound last week. It lost some of its ground against both the Dollar and the Euro but remained broadly flat. This was driven, in part, by persistent inflation at 3.4% and steep decline in retail sales (from 5% in April to -1.3% in May) evidencing continued underperformance in the UK economy. On Thursday, the BoE decided to hold rates at 4.25% (6 votes Vs 3), which had been priced in by the market.

What to watch for in the short-term?

Back in April, as tariff and global uncertainty rose, there was a sell off in the Pound especially against lower-yielding and safer currencies such as CHF and EUR. As the middle east tension grows, there is the possibility of another similar slump for GBP. This week, Sterling price action will likely be driven by wider global geopolitics as the macro data is relatively quiet other than PMI data released today.

What about the coming months?

The market still anticipates 2 rate cuts before the end of the year. The first of these is likely to be in July or August. However, the UK is a net energy importer and exposed to energy price rises. If Middle East tensions push up prices then this will likely skew inflationary pressures upwards and slow rate cutting by the BoE.

Calendar

Monday ⏐ Flash PMI Services

US Dollar

What happened last week?

The Fed held headline policy rates between 4.25-4.50% again last week despite striking a more dovish tone. FX markets remained muted following the announcement despite higher rate forecasts and lower GDP forecasts.

Over the weekend, the US struck nuclear facilities in Iran which was followed by Iran vowing to respond against US assets. As a result, the DXY index opened 0.5% higher on Monday morning.

What to watch for in the short-term?

All eyes will likely be on the oil price because of the correlation between Brent and the Greenback has been historically strong. This morning Brent opened 4% higher above $80/bbl and the Dollar appreciated alongside it. After the US strike, the likelihood of the Strait of Hormuz being closed has increased. Were this to happen, bank forecasts for Oil prices are currently ranging from hitting $110-130/bbl and, in turn, a strengthening Dollar.

What about the coming months?

Since April, we have seen a Dollar decline which sparked debate about whether it still is a safe haven asset. A BIS report on April's tariffs suggested that most of this sell-off came from increased hedging rather than a loss of dollar confidence. And thus, as global uncertainty increases, we could see USD strengthening and a return of the dollar smile.

Calendar

Friday 13.30 ⏐ Gross Domestic Product (Q1)

Friday 13.30 ⏐ Core PCE Deflator

Euro

What happened last week?

The Euro had a strong week against the Pound and held steady against the Dollar in the 1.145-1.161 region. It was a slow week for Euro data but speeches from ECB members gave hints that there was a positive outlook for the Eurozone.

What to watch for in the short-term?

Analysts have taken a bullish perspective on lower-yielding currencies which ought to benefit the Euro especially against GBP and USD. There are ongoing NATO discussions that are going to conclude on Wednesday. The implications of this will likely be felt both in the EU's negotiations with the US as well as in domestic fiscal policy.

What about the coming months?

The Eurozone is more susceptible than others to oil prices shocks because of its heavy reliance on imports. We could be staring down the barrel of a supply-side shock. The ECB president has stressed that strengthening the Euro needs to be a priority for the EU as it would unlock better financing rates and ensure that Europe is sufficiently resilient. This attitude will likely persist throughout the Trump presidency and will be worth keeping an eye on.

Calendar

Friday ⏐ France & Spain PMI data

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