US Inflation, ECB Decision and UK GDP in Focus as Dollar Strength and Middle East Tensions Drive Markets

Key Highlight

• The US dollar remains well supported following stronger than expected employment data and renewed geopolitical tensions in the Middle East.

• Sterling faces a crucial test this week with UK GDP data expected to provide further insight into the strength of the domestic economy.

• The European Central Bank meeting will be closely watched, with markets looking for signals on the future path of interest rates and inflation policy.

Market Recap

The US dollar finished last week on a strong footing after US labour market data comfortably exceeded expectations. Non-farm payrolls came in above forecasts while the unemployment rate remained unchanged, reinforcing confidence in the resilience of the US economy. As a result, investors increased expectations that the Federal Reserve could still deliver another interest rate rise before the end of the year.

Sterling struggled throughout the week as concerns over the UK's economic outlook continued to weigh on sentiment. With limited domestic data offering support, the pound remained under pressure against a stronger dollar.

The euro also lost ground, with EUR/USD falling to its lowest level in two months. Weak Eurozone growth figures added to the pressure, although much of the move reflected broad based dollar strength rather than a significant deterioration in the euro's outlook.

In Japan, USD/JPY briefly moved above the 160 level before retreating. Japanese officials once again warned that they remain prepared to act if currency movements become excessive. While no intervention took place, ongoing comments from policymakers highlight growing concerns about continued yen weakness.

Geopolitical developments dominated headlines over the weekend as tensions between Israel and Iran intensified following direct missile exchanges. The deterioration in relations has increased uncertainty across financial markets and added support to traditional safe-haven assets. Additional disruption risks emerged after Houthi forces announced restrictions on Israeli linked shipping through the Red Sea, raising concerns around global trade routes and energy supplies. Oil prices reacted higher, helping underpin demand for the US dollar.

Market Overview

Markets begin the week focused on the escalating situation in the Middle East. Investors will be monitoring whether tensions continue to rise or if diplomatic efforts can regain momentum. Any further deterioration is likely to support demand for the US dollar and keep oil prices elevated, while signs of de-escalation could encourage a recovery in risk sensitive currencies such as the pound and euro.

Attention then turns to Wednesday's US inflation report. Following last week's strong employment figures, inflation data now takes centre stage. A higher-than-expected reading could strengthen expectations that the Federal Reserve will maintain a restrictive policy stance for longer, providing further support for the dollar.

Thursday brings the latest European Central Bank policy meeting. Markets broadly expect policymakers to maintain a firm stance on inflation, with investors looking for guidance from ECB President Christine Lagarde on the likelihood of additional policy tightening. Any indication that rates may need to remain higher for longer could offer support to the euro, while a more cautious tone may weigh on the single currency.

The week concludes with UK GDP figures, which could prove significant for sterling. A weaker reading would reinforce concerns surrounding the UK's growth outlook and potentially place further pressure on the pound. Conversely, stronger than expected growth could improve confidence in the economy and help sterling recover some recent losses.

08th June 2026

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