CAPITALDIGEST MARKET REVIEW, 01/06/2026
June 1, 2026
DOLLAR STEADIES AS MARKETS AWAIT SIGNALS ON IRAN WAR, CENTRAL BANKS
The U.S. dollar held steady on Monday after a weekly loss as markets awaited progress of peace talks in the Middle East and signals on the timing of central bank moves. The six-currency dollar index edged lower last week on hopes for a deal between the United States and Iran to open the Strait of Hormuz shipping lane for oil. Oil jumped in early trade after Israel ordered troops to move further into Lebanon, while the U.S. and Iran claimed new strikes on each other.U.S. jobs data later in the week will be in focus as Federal Reserve officials signal that the U.S. central bank may need to raise rates if the war accelerates already-high inflation. “USD will be heavily influenced by developments in the U.S.-Iran war and the U.S. nonfarm payrolls report for May,” said Joseph Capurso, head of FX at Commonwealth Bank of Australia. “Once the Strait is reopened, over time the oil price will fade and interest rates will return as a greater influence on the USD,” he added in a note. The dollar index of the greenback against a basket of currencies including the yen and the euro, rose 0.04% to 99.05, after last week’s drop of 0.4%. The euro fell 0.13% to $1.1644. The yen weakened 0.13% to 159.48 per dollar. Sterling slipped 0.07% to $1.3449. The U.S. said it conducted “self-defense strikes” on Iranian radar and drone control sites over the weekend, while Iran said on Monday its aerospace force had targeted an air base used in an attack. The hostilities came after U.S. President Donald Trump said on Friday he would soon decide on a proposed deal to extend the ceasefire with Iran. U.S. Secretary of State Marco Rubio spoke with Lebanese President Joseph Aoun and Israeli Prime Minister Benjamin Netanyahu on a plan to allow for “gradual de-escalation,” a U.S. official said on Sunday. Netanyahu had said on Sunday that he ordered troops to move further into Lebanon in the battle against Hezbollah. Markets are betting the Fed’s next move will be to raise its key rate compared with expectations for a cut before the start of the Iran war. Outgoing Fed Governor Jerome Powell warned in a speech on Sunday about politicisation of monetary policy, while Beth Hammack, Lorie Logan, and Mary Daly are among Fed officials due to speak later in the week. “The lineup of Federal Reserve speakers throughout the week should continue to reinforce a balanced two-way policy approach, with officials remaining open to both rate hikes and rate cuts depending on incoming data,” Chris Weston, head of research at Pepperstone, wrote in a note. U.S. nonfarm payrolls figures due on June 5 are expected to show an unemployment rate of 4.3% and an increase of 85,000 jobs, according to a Reuters poll. And later on Monday, the Institute for Supply Management’s PMI gauge of manufacturing activity is expected to have edged up to 53 in May from 52.7 the previous month.
STERLING EDGES LOWER, BOE’S BAILEY SIGNALS NO RUSH TO RAISE RATES
The British pound edged lower against the dollar on Friday as uncertainty over a possible U.S.-Iran peace deal kept investors cautious, while Bank of England Governor Andrew Bailey signalled there was no urgency to raise interest rates. Reports said the U.S. and Iran had to extend their ceasefire and lift shipping restrictions through the Strait of Hormuz, but the deal still awaits approval from U.S. President Donald Trump. “If we get close to a ceasefire, some of these underlying macroeconomic developments start taking focus again,” said Kirstine Kundby-Nielsen, senior FX strategist at Danske Bank. “The UK economy isn’t in great shape.”Britain’s reliance on energy imports leaves it more exposed than the U.S. to higher fuel costs. While oil prices have fallen in recent weeks, they remain almost 30% higher than before the war. Sterling was last down 0.2% at $1.3410, near the middle of the $1.33 to $1.35 range it has traded in over the past two weeks. It was down 0.1% for the week. Before the conflict, investors had expected the BoE to cut rates at least twice this year as inflation eased towards target. Since late February, concerns that higher energy prices could reignite inflation have pushed markets to price in rate increases instead. Money market futures now imply 32 basis points of tightening this year – one quarter-point hike and roughly a 30% chance of a second. Bailey said allowing inflation to run above the BoE’s 2% target was justified given uncertainty over the economic impact of the Iran war and the weak pace of growth, signalling policymakers can afford to wait before making any rate moves. The BoE kept rates on hold last month and is widely expected to do so when it meets in June. “I don’t expect the Bank of England to hike to the extent that it’s priced by market,” Danske Bank’s Kundby-Nielsen said. “That should lift euro-sterling over the next year.” Against the euro , the pound was down 0.1% at 86.77 pence.
US DOLLAR WEAKENS ON REPORTS OF CEASEFIRE DEAL BETWEEN US AND IRAN
The U.S. dollar fell against major currencies on Thursday after reports the U.S. and Iran had reached an agreement to extend a ceasefire, though several similar reports over the course of the three-month conflict have not resulted in an end to the war. The dollar has swung in recent weeks, in line with the shifting outlook on the Middle East conflict, gaining when markets expect a prolonged stand-off and falling when reports signal a move toward de-escalation. According to four sources familiar with the matter, the agreement would extend the truce for another 60 days and allow traffic to flow through the strategic waterway while negotiators tackle difficult issues such as Iran’s nuclear program. Axios was the first to report the agreement. The euro gained 0.20% against the dollar to $1.1649. Against the Swiss franc , the dollar weakened 0.37% to 0.784. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, fell 0.3% to 99, putting it on track to snap two sessions of gains following the resumption of hostilities between the U.S. and Iran. U.S. equity markets gained on the day with the Nasdaq (.IXIC), opens new tab adding nearly 1%. U.S. Treasury bond yields fell. The yield on benchmark U.S. 10-year notes fell 2.8 basis points to 4.453%. SOFT U.S. DATA U.S. inflation increased at its fastest pace in three years in April, driven by higher energy prices amid the war with Iran, signalling that the Federal Reserve could hold interest rates unchanged for longer. The personal consumption expenditures (PCE) price index rose 0.4% month-on-month in April after shooting up 0.7% in March. However, core PCE inflation, which excludes food and energy prices, gained 0.2% in April on a monthly basis after advancing 0.3% in March U.S. economic growth for the first quarter was also revised lower. “The combination of core PCE, which came in a little bit softer, and the growth data also coming in a little softer sends a message that perhaps that the Fed can be a little bit less aggressive with its higher-for-longer, which is somewhat risk-supportive,” said Joel Kruger, market strategist at London-based LMAX Group. “Ultimately, until we figure out a resolution to the geopolitical side and what it’s going to be with inflation, it’s a lot of kind of just choppy and directionless trade.”
STERLING DIPS AS HOPES OF IMMINENT IRAN PEACE DEAL FADE
The pound slipped on Tuesday after optimism about an Iran peace deal was tempered by U.S. attacks on Iranian targets and comments from Secretary of State Marco Rubio that talks could still take a few days. Sterling was last down 0.2% at $1.348 after rallying 0.6% on Monday on hopes of a deal to end the war and reopen the key Strait of Hormuz. The euro was 0.2% higher against the pound at 86.36. Markets have dealt with conflicting headlines on the talks in recent days, as they have throughout the conflict. On Saturday U.S. President Donald Trump said a deal was “largely negotiated”, before rowing back his comments the following day. Most recently, Rubio said on Tuesday that a deal could “take a few days”, denting hopes for an imminent end to the conflict. Sterling has wavered throughout the war, largely as investors have bought and sold the safe-haven U.S. dollar on the back of developments in peace talks. It is now little changed against the dollar since the start of the conflict on February 27, though it has climbed more than 1% against the euro in that time. Politics has also influenced Britain’s currency, which fell after the May 7 local elections as investors braced for a challenge to Prime Minister Sir Keir Starmer from within his own Labour Party, before rebounding in recent days. “The prospect of a leadership challenge from (Manchester mayor) Andy Burnham has added to the headlines, but we expect only limited fiscal policy change regardless of the outcome,” said Constantin Bolz and Dominic Schnider, currency strategists at UBS, in a note to clients. They argued that once the Iran conflict is over the outlook for the pound will brighten. “While GBPUSD may stay subdued in the short term due to UK political noise and high oil prices, we expect a recovery as uncertainty fades, oil prices normalize, and robust economic data support the pound.” The UK economy expanded 0.6% in the first quarter of the year, although experts have said the figures could have been distorted by seasonal adjustments. Data last week pointed to signs of weakness, with UK employers cutting hiring and retail sales sliding.
DOLLAR CLIMBS AS US STRIKES ON IRAN DENT CEASEFIRE OPTIMISM
The dollar edged higher against major currencies including the euro and yen on Tuesday, after renewed U.S. strikes on Iran dented optimism for a near-term ceasefire, boosting demand for the safe-haven greenback. Iran said the U.S. had violated a ceasefire after it conducted what it called defensive strikes in southern Iran, while U.S. Secretary of State Marco Rubio said that negotiating a deal to halt the conflict could “take a few days.” Hopes for a peace deal have waxed and waned over the last several weeks, as confident assertions by U.S. President Donald Trump of an imminent agreement have not been followed by an actual deal to open the crucial Strait of Hormuz shipping channel. Optimistic talk over the weekend earlier pushed Brent crude oil prices below $100 a barrel and eased demand for the greenback. Demand for the dollar picked up slightly on Tuesday as investors’ hopes for a swift end to the conflict ebbed, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “It’s pretty straightforward what happened: We go home over the weekend, thinking we’re close to a ceasefire and now there are new hostilities. So I think the market is waiting for developments,” Chandler said. The euro was down 0.12% against the dollar at $1.1629. The dollar strengthened 0.4% to 0.786 against the Swiss franc . The dollar index rose 0.13% at 99.16 after falling 0.3% the previous day. Brent crude futures rose 3.58% to settle at $98.58 a barrel after dropping 7% on Monday. U.S. consumer confidence eased in May as worries about inflation linked to the war intensified. The British pound fell 0.45% to $1.3445. The shift in sentiment weighed on the Japanese yen, pushing it closer to the 160-per-dollar level that traders see as a potential trigger for intervention by Tokyo. The Japanese yen weakened 0.2% against the greenback to 159.31 per dollar. The Australian dollar , often viewed as a proxy for risk, was 0.1% down at $0.7167. The dollar strengthened 0.03% to 6.786 versus the offshore Chinese yuan. “FX markets remain narrowly focused on a single theme – the back-and-forth in headlines, risk sentiment, and energy prices around the conflict in the Middle East,” Goldman Sachs analysts led by Stuart Jenkins said in an investor note. “As the shock approaches its three-month mark, we note that the correlation across Dollar pairs remains exceptionally high.”