Forex News

Nomura’s European Economics team, led by Andrzej Szczepaniak and colleagues, notes that the ECB delivered a 25bp hike to a 2.25% depo rate and unveiled more hawkish forecasts. Despite a dovish tone from President Lagarde, Nomura now expects three further 25bp hikes by March 2027, taking the depo rate to 3.00%, versus a previous 2.50% terminal view.

Hawkish projections versus dovish communication

"The ECB’s new forecasts, however, were more hawkish than we had expected. The ECB forecasts a smaller hit to GDP growth due to the Iran war in this set of forecasts versus March, whereas we expected a meaningful downward revision. Additionally, the ECB sees core HICP inflation above target in 2028 despite three rate hikes embedded into its forecast, in contrast with only two hikes in the March forecast."

"As a result, we modify our ECB call. We now expect the ECB to raise rates in September and December this year and in March next year, bringing the depo rate to 3.00% by March 2027, in contrast with our old view of only one additional rate hike in July this year (and a terminal of 2.50%)."

"The ECB’s new baseline forecasts were hawkish. The calendar year forecasts for GDP growth were barely revised across the forecast horizon, apart from a mechanical adjustment due to the decision to now use “modified domestic demand” instead of GDP for Ireland. The ECB does not forecast a slowing in the euro area’s quarterly growth profile due to the Iran war."

"As for core HICP inflation, the ECB raised its forecasts over the forecast horizon and believes core HICP inflation will average 0.2pp above target in 2028 and also specifically in Q4 2028. The ECB expects core HICP inflation to average above target in Q4 2028 despite three rate hikes embedded into the ECB’s new forecasts, in contrast with only two embedded in the March forecasts."

"Despite our view that Mme Lagarde was on net dovish in the ECB press conference, we believe the ECB’s hawkish forecasts warrant and will lead to more tightening than we had previously assumed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

TD Securities economists expect the Bank of England (BoE) to keep Bank Rate at 3.75% with a 7-2 vote as Greene joins Pill in calling for a hike. They highlight persistent inflation pressures, upside risks from energy and airfare, and softer demand. Their updated call delays the final rate cut to April 2027, keeping Bank Rate at 3.75% through 2026.

BoE seen on hold but hawkish

"We expect the Bank of England to remain on hold with Bank Rate remaining at 3.75%. After her hawkish speech and FT column, Greene is likely to join Pill in dissenting for a hike, bringing the vote to a 7-2, but others are set to remain on hold as they continue to evaluate the trade-off between higher inflation and soft demand."

"Data has also been supportive of an ongoing hold, with inflation softening markedly to 2.8% y/y on the headline measure and 2.5% y/y on core - both surprising to the downside of the market and the BoE's forecasts.The labour market has continued loosening and PMIs point to a slowdown in activity, particularly in services, which suggests that weak demand could still limit firm pricing power. This would reduce the need for Bank Rate hikes, as per most of the MPC members' views."

"However, April's disinflation was largely on the back of administered price base effects, rather than monthly dynamics. And looking ahead, there is still an upside risk as the Ofgem price cap increase of 13.5% takes effect in July and airfare prices start picking up throughout the summer."

"We recently revised our medium-term inflation forecasts to factor in the above points and with inflation now peaking at 3.8% y/y in November, we expect the BoE to delay its last rate cut from November to April 2027. We still believe that the path remains downward to a neutral rate of 3.50%, but that the MPC cannot justify cuts while inflation is rising."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Consumer confidence in the United States (US) improved slightly in June, with the University of Michigan's (UoM) Consumer Sentiment Index rising to 48.9 in the flash estimate from 44.8 in May. This print came in better than the market expectation of 46.

In this period, the Consumer Expectations Index rose to 49.3 from 44.1, surpassing analysts' estimate of 44.3. Additionally, the one-year Inflation Expectation component edged lower to 4.6% from 4.8%, while the five-year Inflation Expectation retreated to 3.4% from 3.9%.

Summarizing the survey's findings, "consumer sentiment ticked up about four index points, or 9%, with consumers experiencing some relief due to the early-month easing in gasoline prices," the UoM noted in its press release.

"Even with June’s early gains, however, views of the economy are still relatively dour. Sentiment is currently 13% below January 2026 and 19% below a year ago, as consumers remain focused on kitchen table issues. They feel burdened by the recent escalation in inflation and worry that higher inflation could remain stubborn going forward, particularly in the short run. Interviews for this release were completed between May 19 and June 8," added.

Market reaction to UoM Consumer Sentiment Index

The US Dollar (USD) Index showed no immediate reaction and was last seen posting marginal gains on the day at 99.75.

This section below was published as a preview of the University of Michigan's preliminary June Consumer Sentiment Index data at 06:00 GMT.

• The Preliminary Michigan Consumer Sentiment Index is seen ticking up to 46 in June from 44.8 in May.
• Consumer confidence is expected to have remained near historic lows as higher prices pinch purchasing power.
• UoM Consumer Sentiment reading is likely to add concerns about the economic consequences of inflation.

The University of Michigan (UoM) will release the preliminary estimate of June’s Consumer Sentiment Index on Friday. The report, measuring consumers’ feelings about personal finances, business conditions, and purchasing plans, is expected to show that consumers’ confidence remains depressed, at levels only beaten by May’s all-time low.

Economic confidence among US consumers is expected to have edged up to 46.0 in June, as measured by the UoM Consumer Sentiment Index, only marginally above May’s record low of 44.8. These figures show the lowest confidence levels since records began in 1952, and a more pessimistic view than during the 1970s Oil crisis, the 2008 recession, or the COVID pandemic. 

Hopes for a brighter future are also poor. The UoM Consumer Expectations Index is also foreseen as consolidating near historic lows, despite an uptick to 44.3 from May’s 44.1 reading. 

Consumption is a key contributor to US economic activity, accounting for about 70% of the country’s Gross Domestic Product (GDP). In that sense, the Michigan Consumer Sentiment Index is considered a reliable forward-looking indicator of US economic trends, and its release tends to have a significant impact on the US Dollar (USD)

What to expect from June’s UoM Consumer Sentiment Index report?

June’s release is expected to provide further evidence that US consumers are struggling amid the higher cost of living. The war in Iran and the subsequent blockade of the Strait of Hormuz have boosted energy prices, pushing costs higher through a wide range of products and services.

If preliminary UoM Consumer Sentiment Index figures align with market consensus, they are likely to shift the focus to the economic consequences of out-of-control inflation and might dampen some of the enthusiasm triggered by the bright Nonfarm Payrolls (NFP) report and the strong services and manufacturing activity data released last week.

May’s survey already highlighted an increasing concern about the inflationary impact on personal finances, an issue that is unlikely to have improved during the last weeks: “The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month.”, said Joanne Hsu, director of the University of Michigan’s Surveys of consumers.

US Consumer Price Index (CPI) figures, released on Wednesday, endorse the view that US consumers are getting squeezed by inflation. Data from May revealed that prices accelerated to a 4.2% year-on-year pace, their highest level since April 2023, with energy prices jumping by a whopping 23.5% in the 12 months previous to May. 

When will the UoM Consumer Sentiment Index be released, and how could it affect the US Dollar?

The University of Michigan will release its Consumer Sentiment Index, together with the Consumer Inflation Expectations survey, on Friday at 14:00 GMT. The market consensus hints at a minor improvement from the previous reading, yet at levels reflecting a deeply negative sentiment. The risk is skewed to the downside for the US Dollar.

The Greenback has shown a solid bullish trend since early May, as investors seek safe assets amid uncertainty in the Middle East conflict. Beyond that, strong US data, namely a significant improvement in the labour market, has boosted hopes that the Federal Reserve (Fed) will be forced to raise interest rates before the end of the year, providing additional support to the USD.

The US Dollar Index (DXY), which measures the value of the USD against a basket of peers, has rallied more than 2% as tensions escalated in the Middle East, casting clouds over the US-Iran peace process.

Guillermo Alcala, FX Analyst at FXStreet, sees limited chances of a significant US Dollar reversal until the situation in the Middle East improves. ”The USD is likely to weaken if consumer confidence figures meet market expectations. Dips, however, are likely to find buyers with risk appetite subdued amid Iran’s conflict. Previous highs at the 99.50 area or the June 4 and 5 lows near 99.15 are expected to hold bearish attempts.”

On the upside, Alcalá sees resistance at the 100.30 and 100.65 areas as the main hurdles for bulls: “Upside attempts are likely to be tested ahead of the April 6 high near 100.30, which, so far, is closing the path to the year-to-date high, in the 100.65 area.”

Brown Brothers Harriman’s Elias Haddad says GBP/USD has given back part of its US-Iran-related gains and is expected to fall to 1.3100 as United States (US) growth outpaces the United Kingdom (UK). Softer UK GDP and PMI data, reduced Bank of England (BoE) hike expectations, and a potentially destabilizing political backdrop, including the Makerfield by-election, are all seen weighing on the Pound (GBP) despite some policy support.

Pound pressured by growth and politics

"GBP/USD pared back some of yesterday’s positive US-Iran breakthrough gains. We expect GBP/USD to fall to 1.3100, reflecting a stronger US growth outlook relative to the UK. BOE rate hikes in a sluggish growth, high inflation environment, is not bullish for GBP but should help cushion the downside."

"In line with consensus, UK real GDP fell -0.1% m/m in April vs. +0.3% in March. This is the first monthly fall since August 2025 and was driven by a decline in services output (-0.2% m/m). Production showed no growth, and construction grew by 0.1% m/m."

"PMI data indicate UK real GDP could contract by -0.2% q/q in Q2, undershooting the BOE’s baseline forecast of +0.1% q/q. The swaps curve slashed BOE rate hike bets over the next twelve months to 40bps from 60bps yesterday. But that largely reflects falling energy prices, as tightening expectations have been curtailed across most other major economies."

"The UK political backdrop can amplify a GBP undershoot. Attention is increasingly shifting to the June 18 Makerfield by-election. Recent polls show Andy Burnham with a 10-point lead over Reform UK, potentially clearing a path for his return to parliament and a leadership challenge to Prime Minister Keir Starmer. A Burnham-led Labour government will likely lead to more spending and borrowing, worsening UK fiscal credibility."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

National Bank of Canada (NBC) strategists assess how Kevin Warsh may reshape Federal Reserve (Fed) policy. They highlight his evolving stance on rates and Quantitative Easing (QE), his preference for trimmed inflation measures, a stronger tilt toward price stability over employment, and reduced forward guidance, all suggesting a less dovish, more volatile policy backdrop for US Dollar (USD) and US rates over coming months.

Warsh era points to tighter communication

"A new era has dawned at the Fed. On Wednesday, Kevin Warsh will lead his first rate decision as Chair of the FOMC, giving markets a better sense of how Powell’s successor intends to steer the central bank. Much about Warsh remains uncertain/unclear, including his preferred policy path."

"Warsh concedes that inflation is too high. But he’s questioned if PCE ex-F&E is the best gauge of underlying price pressures and wants to reform how the Fed looks at inflation. He’s advocated for ‘trimmed’ averages and has emphasized these have exhibited a “quite favourable” trend lately."

"For now, all inflation measures are inconsistent with easing. However, Warsh may take a somewhat more sanguine view when speaking to the inflation outlook on Wednesday."

"Warsh has criticized the Fed’s “mission creep” into social, political, climate, and other issues outside its remit (though the Fed has already been narrowing its footprint here more recently). At his confirmation hearing, Warsh affirmed his commitment to the maximum-employment mandate, but the discussion leaned heavily toward price stability."

"Warsh views post-COVID policy errors as having been compounded by forward guidance. He’s argued that regularly publishing economic, inflation and rate projections can anchor officials into a static view that can make them late to respond to changing conditions. He’s also suggested that Fed officials speak too often and that policy should be decided “in the room”."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

ING’s Chris Turner notes that a potential US-Iran peace deal has softened the Dollar, but DXY is still holding firm. He highlights that energy supply losses and inflation risks persist unless Oil flows freely through the Strait of Hormuz. With the Federal Reserve still seen tightening and next week’s FOMC likely supportive, ING does not expect a deep Dollar sell-off.

Dollar holds firm despite peace optimism

"Financial markets reacted with predictable optimism to news that another US-Iran peace deal may be imminent. Many investors are taking their cue from the oil market, where the surprising softness in energy prices over recent weeks has many guessing that oil traders have the inside track on peace negotiations. Who knows for sure, but it does seem that some progress is being made towards a new 60-day deal where the Strait of Hormuz would be opened, and Iran would be able to sell its oil."

"But the legacy issue of this crisis has been the substantial loss of energy supplies and its inflationary shock sent around the world. Unless oil starts shipping freely in the Strait of Hormuz very soon, our house call is that energy markets could move close to a tipping point in July. In turn, we would be wary about expecting much lower oil prices from current levels."

"With the fallout from the oil shock coming at a time of stable to positive US jobs numbers, investors are still wary of how the Fed will react. Short-dated US rates have come lower, but the market still prices 20bp of Fed tightening this year. It is hard to see that being unwound ahead of next Wednesday's FOMC meeting, where a new-look statement and a new set of forecasts could prove dollar supportive."

"DXY has been holding up quite well despite a hawkish ECB and a potential ceasefire in the Gulf. We expect it to find continued support near 99.50."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)