CAPITALDIGEST MARKET REVIEW, 06/07/2026

STERLING SET FOR BIGGEST WEEKLY JUMP IN 12 WEEKS ON EASING POLITICAL RISK, SOFT DOLLAR

The British pound was headed for its biggest weekly jump in 12 weeks against the U.S. ‌dollar on Friday, helped by easing domestic political risk and soft U.S. labour market data.Sterling was up 0.1% at $1.3357, taking its weekly gain to 1.2%, its biggest weekly jump against the dollar since early April. The dollar retreated after the U.S. ​added fewer jobs than expected last month, cooling expectations for rate hikes from the Federal Reserve. British markets ​had shown signs of unease when Andy Burnham, the only Labour lawmaker to say ⁠he wants to replace outgoing Prime Minister Keir Starmer, gained support for a possible leadership challenge. Burnham had ​previously stated that the country had to get “beyond this thing of being in hock to the bond markets”, worrying ​some investors that thought he would abandon the government’s borrowing pledges. But markets have taken comfort from Burnham’s commitment to the country’s existing fiscal rules, which include balancing day-to-day spending with tax revenues and reducing debt as a share of output. “There’s a bit ​of risk premia leaving sterling and therefore the currency is strengthening,” said Karl Steiner, head of analysis at ​SEB. Against the euro, the pound was down slightly at 85.73 pence. On Thursday it touched its strongest level against the ‌single currency ⁠in a year at 85.47 pence. Markets are still pricing in a greater chance of a rate hike than a rate cut from the Bank of England this year, despite the easing of hostilities in Iran and the slow resumption of oil supplies from the Middle East. On Thursday, BoE rate-setter Catherine Mann said looser financial ​conditions since the last rate ​meeting in June will ⁠be a key factor in her decision on rates at the July meeting. In Thursday’s speech, Mann said she would be ready to vote for a rate rise ​if higher inflation expectations in the wake of the U.S.-Iran war make it ​less likely that ⁠inflation will return to its 2% target. Mann signalled a readiness to make an ‘activist’ increase in the policy interest rate if H2 2026 data disappoint on inflation expectations,” said Commonwealth Bank of Australia currency strategist Carol Kong, adding ⁠that sterling ​was underpinned by Mann’s comments. Money market futures imply around a 70% ​chance of a rate hike by year-end. Prior to the Middle East conflict, investors had expected the BoE to cut rates twice ​in 2026.

DOLLAR SET FOR BIGGEST WEEKLY DROP SINCE APRIL AFTER JOBS DATA LOWERS FED HIKE BETS

The U.S. dollar was ​heading towards its biggest weekly loss in 12 weeks on Friday after Thursday’s tepid U.S. jobs report ‌cooled market expectations for a near-term Federal Reserve interest rate hike, providing relief for the Japanese yen. Broad dollar weakness lifted the euro to $1.1440, after it hit a nearly two-week high the day before. It was up 0.5% on the week. The pound firmed to $1.3352 for a 1.1% weekly gain, ​its best in nearly three months. The stronger dollar also offered respite for the Japanese yen , which strengthened to less ​than 161 per dollar, but markets remained nervous about intervention risks after a sudden jump on Thursday ⁠lifted the currency from a 40-year low of 162.84. It was last at 161.25 The dollar fell after ​U.S. job growth slowed sharply in June and payroll gains for the prior two months were revised lower, prompting traders to trim bets ​on a near-term Fed rate rise.Markets are pricing in about a 45% chance for a hike at the September meeting, according to the CME FedWatch tool. U.S. Treasuries were closed on Friday for the Independence Day holiday. “We don’t have a hike in our forecast, so this was in ​line with our views that we would get a turnaround here eventually and a weaker dollar,” said Karl Steiner, head ​of analysis at SEB. “I wouldn’t be surprised if we see some more downside.” The dollar index , which measures the U.S. currency against a basket including ‌the ⁠yen and the euro, was roughly 0.2% lower at 100.83 after a 0.5% dip on Thursday. It was down 0.5% for the week, the biggest weekly drop since early April.Although the yen has recovered from 40-year lows, investors remained on alert for possible intervention during a holiday-thinned session with U.S. markets closed for Independence Day.”You have to have ​it on the radar,” said ​SEB’s Steiner, referring to the ⁠possibility of intervention. “Historically they have preferred to do it whenever there is lower liquidity.” Japan issued a warning to currency markets on Friday as Finance Minister Satsuki Katayama said Tokyo was in regular ​contact with Washington on foreign exchange issues and remained ready to support the yen. Japan’s Chief ​Cabinet Secretary Minoru ⁠Kihara said they were closely monitoring market movements with a sense of urgency.Markets are concerned about Japanese officials abandoning their habit of telegraphing risks, instead signalling a more targeted campaign to squeeze speculators and raise the cost of betting against the yen. “The bigger question is what ⁠comes next,” ​said Tony Sycamore, an analyst at IG, who said the recent 40-year peak ​in dollar-yen has become a short-term top. “Whether it becomes a more meaningful medium-term high will ultimately depend on incoming U.S. data and, to some degree, developments ​in the Japanese government bond market.”

POUND FALLS AS DOLLAR FORGES HIGHER AHEAD OF FED’S WARSH COMMENTS

The pound fell for ​the first time in a week on Wednesday in the face of a robust dollar, which got ‌a lift from a rise in U.S. Treasury yields ahead of jobs data, while markets were also awaiting comments from new Fed Chair Kevin Warsh. Sterling was down 0.23% at $1.3234, having risen for the past four days, marking its longest stretch of daily gains in a month. The ​pound closed out a volatile June with a loss of 0.2%, bringing the decline over the first half ​of the year to 1.6%, making this its weakest start to a year since 2022, when ⁠it fell nearly 10% from January to June. Another upcoming change in British leadership, with Labour Prime Minister Keir Starmer ​stepping down, has put investors on edge about how Andy Burnham, his likely replacement, will revive the British economy without further ​straining the government’s already stretched finances. A resurgence in the dollar, thanks to the strength of the U.S. economy and its stock market, has played a large role in depressing sterling and other currencies. Against the euro the pound rallied throughout the second quarter, posting a rise ​of 1.4% to trade around its strongest since last August. Expectations for the Bank of England to raise interest rates this ​year have moderated since the hostilities in the Gulf have subsided, which has brought the oil price back to pre-war levels. Money markets ‌show ⁠traders see a 90% chance of a BoE hike by the end of this year. At one point recently, as many as three hikes were priced in. The BoE meets later this month to discuss monetary policy, and economists predict there will be no change in interest rates. The big risk events for currencies including sterling this week include U.S. monthly employment data on ​Thursday, which carries the potential ​to either cement or ⁠dispel mounting expectations for the Federal Reserve to raise U.S. rates as early as this month. Central bankers from around the world are in the Portuguese town of Sintra this week for ​the European Central Bank’s annual forum. The Fed’s Warsh will take part in a panel ​and later ⁠address the gathering on Wednesday. Given his preference for shorter statements and less communication from policymakers, investors will scrutinise his words for any sign of what might happen with U.S. rates in the coming months. “Bank ​of England Chief Andrew Bailey may be the man to watch considering ​that it’s the BoE that is most stuck in the middle with policy and has thus far been rather opaque regarding policy going forward,” Caxton ​strategist David Stritch said.

EURO ZONE INFLATION FALLS MORE THAN EXPECTED, ADDING TO ECB CASE FOR PATIENCE

Euro zone inflation eased last month far more than expected, further curbing pressure on the European Central Bank to raise interest rates again this month ​to offset quick price growth. Overall inflation in the 21 nations sharing the ‌euro currency slowed to 2.8% in June from 3.2% in May, coming well below expectations for 3.0%, as food, energy and services inflation all slowed. A more closely watched figure on underlying ​prices, which filters out volatile food and fuel prices, meanwhile slowed to ​2.4% from 2.6% as services inflation dropped to 3.2% from 3.5%. Although the ⁠June reading is still well above the ECB’s 2% target, the recent decline ​in oil prices on bets for a peace deal has raised hopes that price ​pressures would ease from this point and the broader damage from the energy price surge would remain limited. Indeed, a host of policymakers, speaking on and off the record, have said that there is no ​rush for the bank to follow up June’s quarter-point rate hike with another ​move this month and policymakers could afford some time to see how price pressures evolve. The ECB ‌is ⁠especially worried that the initial energy shock will start pulling up the price of other goods and services, eventually lifting wages as well. But such second-round price effects have yet to materialize and wage pressures are also not accelerating, boosting the case ​for patience. Still, the vast ​majority of economists ⁠and investors think that the ECB is likely to raise rates again in September or October, even if there is a ​pause in July. This is because energy prices still remain far ​above pre-war ⁠levels and the Middle East conflict could take yet another unexpected turn, like many times before, keeping price expectations volatile. There are also worries that the shortage of fertilizer from ⁠the ​Middle East and a European heatwave could reduce ​crop yields and put some upward pressure on food prices, lifting inflation just as energy costs are easing.

DOLLAR GAINS BEFORE US JOBS REPORT, FED’S WARSH SEES IMPROVING INFLATION

The dollar gained ahead of a closely watched U.S. jobs report due on Thursday, but pared its earlier increase after Federal Reserve ​Chair Kevin Warsh said that inflation expectations and inflation risks have eased in recent weeks. The Japanese yen, which had earlier slumped to a 40-year low against ‌the greenback, rebounded as the dollar faded. Warsh, speaking at an international panel, said that he will stick firmly to the U.S. central bank’s 2% inflation target. He also set an ambitious timeline for the U.S. central bank to “discover” and start relying on real-time economic data that’s superior to what he described as problematic government reports. Asked if he thought artificial intelligence might for now at least be inflationary, Warsh responded generically that it was up to the central ​bank to ensure it is not, rather than untangle how some aspects of AI might strain available resources even if it ultimately raises productivity. The dollar has been underpinned ​by rising expectations of Fed rate hikes this year, as inflation runs well above the central bank’s 2% annual target. Still, many analysts ⁠believe the inflation picture will improve in the months ahead. “Nothing that we see suggests that any imbalance either on the activity side or the inflation side is growing rapidly,” said Steve ​Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank’s New York branch. “You can afford to wait and see how these longer-term technological trends play out,” ​Englander added. “What we do see is that unit labor costs are very, very soft, and ultimately that’s what the Fed controls.” Even absent a more hawkish Fed stance, other forces are drawing capital to the United States and supporting the dollar, including the rapid adoption of AI. A resilient labor market, which has produced far stronger job gains than expected for the past three months, has also bolstered the outlook for U.S. growth. Thursday’s data is ​expected to show U.S. employers added 110,000 jobs in June, with the unemployment rate holding steady at 4.3%, according to the median estimate of economists polled by Reuters. The ADP National Employment Report ​on Wednesday showed that private employment rose by 98,000 jobs last month, below economists’ forecasts for 118,000 job gains. Fed funds futures traders are pricing in 66% odds of a Fed rate hike by September. The dollar ‌index , which ⁠measures the greenback against a basket of currencies including the yen and the euro, was last up 0.17% at 101.41.