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European Central Bank (ECB) President Christine Lagarde said on Monday that policymakers are not yet seeing signs that the latest inflation shock requires a more aggressive policy response, even as geopolitical tensions add fresh uncertainty to the Eurozone outlook. Speaking before a European Parliament committee hearing on June 22, Lagarde said there was “no evidence yet of de-anchoring or second-round effects” that would justify a more forceful monetary policy stance.

Key takeaways:

No evidence yet of de-anchoring or second-round effects warranting more forceful policy action.

The ECB remains confident that, with appropriate monetary policy action, inflation will return to target.

The Iran war is weighing on activity, while data points to a slowdown, especially in services.

The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth.

The current inflation shock appears to be smaller in magnitude than the previous one.”

Lagarde downplays inflation risks, leaving Euro bulls cautious

The FXS Speech Tracker score of 4.6/10, below Lagarde’s historic 6/10 average, signals a mildly dovish tilt as the speech stresses no evidence of de-anchoring or second-round effects that would justify more forceful tightening. Emphasis on the fact that current inflation shocks are smaller than in the previous episode, and confidence that inflation will return to target with “appropriate” policy action, point to a preference for a gradual, data-dependent stance rather than aggressive hikes. This makes it a modest negative for the Euro.

At the same time, Lagarde highlights the war in Iran weighing on activity, a slowdown in services, and an outlook marked by upside risks to inflation and downside risks to growth, underscoring a potentially stagflationary backdrop. This mix of softer growth and still-uncertain inflation keeps the ECB in a cautious wait-and-see mode, limiting immediate Euro upside while preventing a fully dovish re-pricing as markets weigh the risk of renewed price pressure.

Societe Generale’s Kit Juckes notes that UK political change is generating only modest Sterling (GBP) weakness, with EUR/GBP seen one to two percentage points higher and GBP/USD likely to test 1.30 this summer. He argues that Sterling remains vulnerable due to inflation and the balance of payments, but stresses that US Dollar direction after the latest FOMC meeting and upcoming Personal Consumption Expenditures (PCE) Price Index data will dominate FX trends.

Summer test of 1.30 on Dollar drivers

"The UK is heading for its seventh Prime Minister since the Brexit vote 10 years ago. The FX market is not overreacting so far, and only modest sterling weakness is likely from here, taking EUR/GBP one or two percentage points higher, while GBP/USD is likely to test 1.30 this summer."

"The pound is weaker than it was before Brexit, but "cheapness" is slowly being eroded by inflation. That, together with the balance of payments, leaves the currency vulnerable, but it is the direction of the US dollar that will be the main driver of FX trends in the coming weeks and months."

"Last week's FOMC meeting has changed the mood, and US economic data will determine FX trends for now. This week, that means second-tier real economy data and the PCE deflators."

"Our economics team expects May's core PCE deflator to rise by 0.4% m/m and 3.5% y/y, which would probably send the dollar higher."

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

Rabobank’s Senior Macro Strategist Teeuwe Mevissen notes that divergence between the Federal Reserve (Fed) and European Central Bank (ECB) is becoming more important for EUR/USD. The Fed has dropped its easing bias and kept rates at 3.50–3.75%, while the ECB has resumed tightening with a 25 bp hike. Mevissen argues these relative rate dynamics could support the Euro near term, though weaker Eurozone growth and energy vulnerability offset this.

Policy divergence underpins Euro prospects

"Last week’s Federal Reserve meeting saw the dropping of the easing bias narrative. The Fed held the target range for the federal funds rate at 3.50–3.75%, citing solid economic activity and still-elevated inflation pressures. At the same time, updated projections suggest only a gradual decline in inflation towards the 2% target, with core PCE inflation expected to remain above target through 2026."

"We expect two rate cuts in April and June next year."

"In contrast, the European Central Bank has already shifted back into tightening mode, raising policy rates by 25 basis points earlier in June. The ECB explicitly cited the inflationary effects of the energy shock and revised its inflation projections upward, now expecting headline inflation to average 3.0% in 2026. At the same time, growth forecasts were revised down—highlighting the stagflationary trade-off facing policymakers."

"In currency markets, divergence in monetary policy paths is becoming increasingly relevant. With the ECB tightening and the Fed on hold, relative rate dynamics could provide some support for the euro in the near term. However, this is counterbalanced by weaker growth prospects in the Eurozone and a higher vulnerability to energy shocks."

"More broadly, cross-asset dynamics continue to be shaped by the interplay between inflation and growth expectations. The current environment is characterized by: Equity markets pricing resilience, Bond markets pricing persistent inflation and commodities reflecting geopolitical risk. This divergence suggests that markets have yet to converge on a coherent macro narrative."

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

• WTI falls toward $74.50, down 2.54% on the day after failing to hold gains above $78.00.
• Reported progress in negotiations between the US and Iran is easing fears of prolonged supply disruptions.
• Comments confirming efforts to keep the Strait of Hormuz open are adding pressure to Crude Oil prices.

West Texas Intermediate (WTI) US Oil declines sharply on Monday and trades around $74.50 at the time of writing, down 2.54% on the day. The Crude Oil gives back the gains recorded earlier in the day after testing highs near $78.00, as investors rapidly unwind the geopolitical risk premium that had supported prices in recent weeks.

Selling pressure intensifies following several encouraging developments regarding talks between Washington and Tehran. Mediators from Qatar and Pakistan stated that a roadmap aimed at reaching a final agreement within 60 days had been established, paving the way for further technical negotiations. This development fuels hopes for a lasting de-escalation of tensions in the Middle East.

The market is also reacting to positive comments from both sides. United States (US) Vice President JD Vance said that mechanisms had been put in place to ensure the Strait of Hormuz remains open and to prevent further regional escalation. On the Iranian side, Foreign Minister Abbas Araghchi described the talks as making “great progress,” highlighting advances related to Oil and petrochemical exports.

The importance of the Strait of Hormuz for energy markets remains significant, as roughly 20% of global energy supplies pass through the strategic waterway. Concerns over a potential closure of the strait had provided strong support to Oil prices in recent days. Recent announcements are now reducing that risk in the eyes of investors.

However, the geopolitical backdrop remains fragile. Initial optimism was tempered by threats from US President Donald Trump to intensify strikes against Iran if Tehran-backed groups continued their actions in Lebanon. According to several media reports, those comments prompted Iranian negotiators to temporarily suspend talks in Switzerland.

Despite this ongoing uncertainty, the market appears to be favoring, for now, a scenario in which Oil flows remain uninterrupted and relations between the two countries gradually normalize. This outlook is weighing on Crude Oil prices, as traders reassess the likelihood of supply disruptions in the global market.

BNY’s Geoff Yu notes that progress in U.S.–Iran talks and a ceasefire framework for Lebanon have helped Oil markets price a more durable de-escalation, supporting a broader risk-positive environment. Yu expects this stability to anchor inflation expectations and feed into monetary policy decisions, even as shipping through the Strait of Hormuz shows some disruption.

Gulf ceasefire supports stability

"The U.S. and Iran have concluded the first round of their high-level talks in Switzerland, with mediators Qatar and Pakistan saying both sides have agreed to a roadmap toward a final deal within 60 days. Technical discussions will continue this week in Bürgenstock."

"The talks have focused on a ceasefire mechanism for Lebanon, safe passage through the Strait of Hormuz and implementation details of last week’s memorandum of understanding. Iran said it had secured waivers for oil and petrochemical exports, release of some frozen assets and a reconstruction plan, while the U.S. said discussions also addressed deconfliction mechanisms for the strait."

"Despite the difficult start, U.S.-Iran talks appear to be making progress, and the reaction in oil markets clearly points to expectations that the ceasefire will be durable. This should mean that the hard-earned improvement in inflation expectations can start to become embedded in the next round of monetary policy decisions."

"Despite tense rhetoric and President Trump’s threats of renewed strikes, mediators described progress, while shipping through the strait showed signs of disruption."

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

ING’s Francesco Pesole expects Fedspeak and developments around the Strait of Hormuz to be the key drivers for the Dollar this week, with front-end USD rates remaining central for DXY. He notes upside risks for USD in the near term but does not see a new strong Dollar cycle, and highlights lower Oil prices as a potential brake on gains.

Fedspeak and geopolitics steer Dollar

"We expect the two main drivers for the dollar this week to be Fedspeak and news on whether Strait of Hormuz flows have continued."

"In this quieter period of the month for data releases, Fedspeak should be the main trigger for any adjustments in front-end USD rates, which have been the single most important driver of USD of late."

"For now, our dollar call remains unchanged."

"Near-term risks remain skewed to the upside, but we do not see last week as the start of a new strong dollar cycle."

"Markets may try to use the next data or Fedspeak catalyst to price in 50bp of Fed tightening in 2026, but unless there is a fresh Middle East escalation, lower oil prices should contain USD gains."

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

Canada’s inflation picked up pace in May, with the Consumer Price Index (CPI) rising 3.2% from a year earlier, above market expectations and up from the 2.8% increase recorded in April. On a monthly basis, prices rose 1.0%.

Meanwhile, the Bank of Canada’s (BoC) preferred core measure, which excludes more volatile components such as food and energy, rose 2.2% over the past year and increased by 0.6% compared with the previous month.

Looking at the BoC’s other key inflation gauges, Common CPI came in at 2.7% (from 2.5%), Trimmed CPI at 2.0% (from 2.0%), and Median CPI at 2.1% (from 2.1%). Together, they show that underlying price pressures are still fairly sticky, while the downward trend appears to have stalled for now.

According to the press release: “Higher prices for gasoline continued to drive the acceleration in the headline CPI in May. However, excluding gasoline, the CPI still rose at a faster pace year over year in May (+2.2%) compared with April (+2.0%).”

Market reaction

The Canadian Dollar (CAD) is slightly weaker on Monday, pushing USD/CAD closer to new 14-month highs near the 1.4200 level following the release of domestic inflation data.

This section below was published as a preview of the Canadian inflation report at 08:00 GMT.

• Canadian inflation is expected to rise by 2.9% YoY in May.
• The core CPI is still seen well above the BoC’s 2% target.
• The Canadian Dollar has been steadily depreciating against the US Dollar.

The publication of Canada’s May Consumer Price Index (CPI) figures on Monday will be the focus of attention. Indeed, Statistics Canada data will provide markets with an update on price pressures following its June 10 meeting, where policymakers kept the interest rate steady at 2.25%, matching the broad consensus.

Economists expect the headline CPI to rise by 2.9% in the year to May, still above the Bank of Canada’s (BoC) target and up from April’s 2.8% annual increase. On a monthly basis, prices are expected to rise by 0.7%. The bank will also closely monitor its core measure (which strips food and energy costs), which is expected to rise by 2.2%, up from 2.1% YoY in the previous month.

Following the US-Iran deal, the geopolitical premium on crude Oil prices should dissipate, reducing inflationary pressure from this source and leaving US tariffs as the sole potential driver of increases in consumer prices. 

What can we expect from Canada’s inflation rate?

Inflation gained some momentum in April, and market participants appear to bet on further continuation of this trend in May.

At its latest gathering, the BoC left its policy rate unchanged at 2.25%. Governor Tiff Macklem repeatedly emphasised that any future policy move would depend on evolving economic conditions rather than on a predetermined timetable. He also highlighted that core inflation has edged lower and reiterated that weakness in the Canadian economy continues to exert downward pressure on prices.

So far, market participants expect just over 22 basis points of tightening by year-end.

Furthermore, the bank’s preferred gauges, CPI-Common, Trimmed Mean, and Median, also moderated, but at 2.5%, 2.0%, and 2.1%, respectively, they continued to run above the bank’s goal.

When is the Canada CPI data due, and how could it affect USD/CAD?

Markets will fully focus on Monday at 12:30 GMT, when Statistics Canada publishes May’s inflation figures. If inflation continues to pick up momentum, the likelihood of further rate hikes could increase, giving some air to the Canadian Dollar (CAD).

Pablo Piovano, Senior Analyst at FXStreet, notes that USD/CAD has been on a steady uptrend since the beginning of May, almost entirely tracking developments from the Middle East conflicts and the US Dollar’s (USD) price action.

Piovano points out that USD/CAD is trading at levels last seen in April 2025, well north of 1.4100. The continuation of this move could challenge the April 2025 peak at 1.4414 (April 1).

On the flip side, he highlights initial support at the vital 200-day SMA around 1.3820, closely followed by the provisional 55-day and 100-day SMAs at 1.3794 and 1.3751, respectively. South from here emerges the May base at 1.3549 (May 1), seconded by the March floor at 1.3525 (March 9) and the February valley at 1.3504 (February 11).

“Momentum could prompt some technical correction,” he adds, noting that the Relative Strength Index (RSI) is navigating comfortably in overbought levels past 86, while the Average Directional Index (ADX) above 44 suggests the underlying trend remains robust.

Deutsche Bank’s Henry Allen notes that despite the US-Iran interim deal and lower Oil prices, the S&P 500 remains below its early-June record and credit spreads have widened. He argues that a prior 16% two-month rally left valuations stretched, while higher US real yields and a more hawkish Fed have offset the macro relief, capping further gains in US equities.

Hawkish Fed and stretched valuations

"Last week’s interim US-Iran deal was a key moment for markets. But despite a considerable fall in oil prices, with stagflation fears easing considerably, risk assets haven’t benefited much. Indeed, the S&P 500 is still beneath its record high at the start of the month, credit spreads have also widened in that time, and other measures of financial stress have ticked up as well."

"Over April and May, there was a genuinely historic rally for many risk assets. Most notably, the S&P 500 was up +16% in a two-month period, something we’ve only seen on four other occasions since WWII. Moreover, three of those were post-recession bouncebacks, so it’s only happened once in a non-recession context, which was a few months before the Black Monday crash in 1987."

"Given we’d seen such a big rally that had stretched traditional valuation metrics, there simply wasn’t much space to rally further to start with. Indeed, this month has seen the CAPE ratio for the S&P 500 reach its highest level since 2000, around the time that the dotcom bubble was bursting."

"Finally, the underlying picture of economic resiliency is unchanged. Data has consistently surprised on the upside, and we’ve not seen the wider macro deterioration needed to generate bigger selloffs historically, whether that’s around an energy shock or generally."

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