CAPITALDIGEST MARKET REVIEW, 22/06/2026

STERLING STRENGTHENS ON BURNHAM WIN, RETAIL SALES DATA

The pound rose on Friday as traders digested a parliamentary by-election victory for Andy Burnham which clears a hurdle for him to potentially oust British Prime Minister Keir Starmer, as ​well as a batch of British economic data. Sterling was last up 0.25% on ‌the dollar at $1.3238, bouncing off a near-three month low hit in Asia trade. Sterling also firmed against the euro, with the common currency down 0.2% at 86.61 pence, moving off an overnight one-month high. “We’re seeing a tactical bounce, a ​Burnham victory has removed some of the uncertainty — if he hadn’t won it’s hard to ​say what would have happened — and retail sales data is also helping,” ⁠said Nick Rees, head of FX strategy at Monex Europe. Burnham won a decisive victory for Britain’s ​ruling Labour Party in an election for a parliamentary seat in northwest England. He has signalled ​that he will use his victory to enter any contest to replace Starmer, though the Prime Minister has vowed to fight any challenge. Friday’s data showed retail sales volumes rose 1.2% in May, well above economists’ forecasts for a 0.5% ​increase, though investors also had to process separate data showing British government borrowing jumped more sharply ​than expected. But away from Friday’s news, the pound has been struggling, against both the euro and the dollar. It ‌has ⁠fallen 1.2% on the greenback this week. The Bank of England left interest rates steady on Thursday and while two of its nine rate-setters voted to tighten policy, most others appeared some way from voting for a hike. Softer than expected inflation data has also led markets to reduce bets on ​the amount of BoE ​rate hikes they expect ⁠this year. They are only pricing one 25 basis point rate increase by year-end. In contrast the European Central Bank raised interest rates last week, ​and the Federal Reserve on Wednesday held rates steady but policymakers’ new ​quarterly projections ⁠showed nine of 19 of them now anticipate a rate hike this year. Rees said he expected the pound to weaken in the coming months as Burnham’s win has removed the immediate uncertainty, but, “It still ⁠doesn’t ​answer the question of what he would do in power.”Married ​to that, some of the data out of the UK has been weak though the market is still pricing in ​rate hikes. We think that’s wild and they won’t hike rates.”

DOLLAR HITS ONE-YEAR HIGH ON FED HIKE BETS; JAPAN WARNS ON YEN

The U.S. ​dollar index hit a one-year high on Thursday after a hawkish tilt by the Federal Reserve led traders to ‌ramp up bets on rate increases this year, dragging the yen to its weakest level in two years and drawing warnings from Japanese officials. The U.S. central bank on Wednesday held rates steady in a 3.50% to 3.75% range as Kevin Warsh began his era in charge with a sweeping policy review. Updated interest rate ​projections showed nearly half of policymakers now expect a hike this year as inflation concerns mount, although the new Fed ​chair did not provide his view. The Fed funds futures market is pricing in 68% odds of a ⁠rate hike by September, LSEG data showed. A stronger U.S. economic growth outlook is adding to rate hike expectations, with the last three ​payrolls reports showing much higher monthly jobs gains than economists had predicted. Data on Thursday showed the number of Americans filing claims for unemployment ​benefits fell last week as layoffs remained low. “We’ve seen very spectacular data in the U.S. that’s been surprising to the upside since late April, then the Fed was as hawkish as market expectations could ever have been, so we’ve seen more dollar upside,” said Sarah Ying, head of FX strategy at CIBC Capital Markets. “There’s ​room for the greenback to strengthen further.” The euro was last down 0.31% at $1.1463, while sterling fell 0.62% to $1.3206, with both reaching their ​lowest levels in more than two months. The dollar index , which measures the greenback against a basket of currencies including the yen, euro and sterling, rose ‌0.45% to ⁠100.80, the highest level since May 2025. It surged 0.85% the previous session, its biggest single-day jump in over three months. “The Fed’s hawkish policy update is threatening to trigger a bullish breakout for the U.S. dollar,” said Lee Hardman, senior currency analyst at MUFG. “The U.S. dollar has derived support from the sharp adjustment higher for short-term U.S. rates … more than offsetting the dampening impact from the U.S.-Iran deal ​announcement over the weekend,” he said. Brent ​crude oil prices fell on ⁠Thursday to their lowest level since March 2. Some 12.5 million barrels of crude sailed through the Strait of Hormuz overnight, U.S. Vice President JD Vance said, hours after President Donald Trump signed ​a deal with Iran to end the war that has disrupted global energy supplies. The Japanese yen weakened as ​far as 161.45 ⁠per dollar, its lowest since July 2024, wiping out gains made after Tokyo’s intervention on April 30. A break above the currency pair’s 2024 high of 161.99 would send the yen to its weakest level since 1986.The renewed slide prompted a fresh government response, with officials reiterating their readiness ⁠to support ​the currency. “We are ready to respond appropriately to currency moves as needed at ​any time,” Chief Cabinet Secretary Minoru Kihara told a press conference when asked about the yen’s decline. Elsewhere, the Bank of England kept interest rates unchanged at 3.75% on Thursday. (This story has been corrected to say that Brent fell to its lowest level since March 2, not February 27, in paragraph 13)

POUND SLIDES TO TWO-MONTH LOW AS DOLLAR JUMPS AND BOE HOLDS RATES

The pound dropped to its lowest ​in two months on Thursday as bets on U.S. rate hikes boosted the dollar and the Bank of ‌England struck a measured tone on inflation as it held borrowing costs steady, while British political risks simmered in the background. Sterling fell as much as 0.6% to $1.321, its lowest since early April, and was last down 0.4%. The pound was already trading lower as the dollar rallied but slipped further ​after the Bank of England held interest rates at 3.75%, judging it would be premature to hike rates given the ​uncertainty around inflation. The BoE’s approach contrasts with the European Central Bank and Bank of Japan, which ⁠both raised interest rates in recent days. On Wednesday, traders moved to price in rate increases from the Federal Reserve this year after ​almost half of policymakers signalled they expected a hike by December. Currency analysts said the BoE now stood out as slightly “dovish”, while other ​central banks were taking a tougher or more “hawkish” stance on inflation. “The currency is moving in line with relative rates,” said Kit Juckes, head of FX strategy at Societe Generale. “The dollar is looking a little bit stronger on the back of the Fed meeting yesterday. The strength of the U.S. ​economy that justifies the slight shift in monetary policy stance.” Oil prices fell again on Thursday in the wake of the U.S.-Iran deal, ​but the focus in markets was on the potential for Fed hikes. Bets on rate increases boosted the U.S. dollar index , which tracks the currency ‌against ⁠its major peers, to its highest in more than a year. British bond yields fell after the BoE decision but remained higher on the day along with European peers, with the rate-sensitive 2-year Gilt yield last up 4 basis points at 4.183%. British stocks (.FTSE), opens new tab were 1% lower. We are inclined to read today’s decision as leaning a little dovish at the margin,” said Nick ​Rees, head of macro research ​at Monex Europe. “Sterling has softened ⁠modestly post-event, but a continued path lower will depend on further signs of economic weakness, and on domestic political risks.” Polls opened on Thursday for a special election that could see Labour Manchester Mayor Andy ​Burnham return to Parliament and challenge embattled Prime Minister Sir Keir Starmer. Concerns among investors that Burnham ​might ramp up ⁠spending should he become PM contributed to a rise in British bond yields to multi-year highs in May, although the increase was largely driven by a jump in oil prices. Yields have since fallen on the Iran peace talks and after Burnham said he would stick ⁠to the ​government’s fiscal rules, although both gilts and the pound could be volatile on ​Friday should Starmer come under pressure. Politics “now looks set to dictate the next leg for sterling,” Rees said.

DOLLAR JUMPS AS FED HOLDS RATES BUT PROJECTS ONE HIKE LATER THIS YEAR

The dollar strengthened across the board on Wednesday after the Federal Reserve held the benchmark interest rate steady and the Fed’s statement showed policymakers expect a ​hike in borrowing costs later this year amid growing concerns about inflation. While the central bank left the policy rate in the 3.50%-3.75% range, new quarterly ‌projections showed nine Fed officials now anticipate a rate hike by the end of 2026, and an updated policy statement removed language that had been used to flag the likelihood of further reductions in borrowing costs in 2026. The statement, in an early sign of new Fed Chairman Kevin Warsh’s influence, removed any guidance about future rate moves altogether, with a revised format that simply stated the rate ​decision and reaffirmed the central bank’s intent to keep “ample reserves in the banking system.” “This Fed decision was short, but not sweet,” Karl Schamotta, chief market strategist ​at Corpay in Toronto, said. “Kevin Warsh moved swiftly to put his stamp on the central bank’s communication strategy by executing a dramatic ⁠revision to the official statement, wiping out anything resembling forward guidance and editing out the bulk of the contextual information typically parsed most closely in financial markets.” The Fed ​statement showed the outlook for inflation was marked up from 2.7% for the end of 2026 to 3.6%. “The committee turned sharply hawkish, with the median participant yanking inflation projections much ​higher – suggesting that officials don’t expect this weekend’s U.S.-Iran deal to result in a serious easing in price pressures – and penciling in at least one hike this year, marking a stark contrast with the cut previously expected,” Schamotta said.Markets are taking it on the chin, with yields moving up in line with rate expectations, the dollar advancing against all of its major rivals, and equity markets tumbling,” ​he said. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.5% to 100.01, the highest in nearly a ​week. The euro fell 0.5% to $1.1549. Short-term U.S. interest-rate futures are now pricing in a bigger chance that the Federal Reserve will deliver a rate hike by September than opt to keep rates ‌where they ⁠are. An interim agreement to end the Iran war has pushed oil prices lower and should help ease some inflationary pressure in the months ahead, though the pass-through to consumer energy prices may take time. Warsh, appointed by President Donald Trump, has suggested he will adopt a different governing approach from his predecessor Jerome Powell, who remains a voting member of the FOMC as a governor. The dollar showed little reaction to data released on Wednesday showing U.S. retail sales increased more than expected in May. The Bank of England meets on Thursday and, as ​with the Fed, no change in policy ​is expected, leaving the focus on the ⁠tone of policymakers’ commentary. That commentary could be shaped in part by Wednesday’s UK inflation data, which showed inflation unexpectedly held at 2.8% in May, unchanged from the 13-month low reached in April. Markets currently see one BoE rate hike by year-end. The yen pared gains from earlier in the session to trade up about 0.05% to 160.385 per dollar, still ​keeping traders on alert ⁠for potential intervention by Japanese authorities to support the persistently weak currency. The BOJ on Tuesday raised rates to a 31-year high in a landmark step in its policy normalization, signaling readiness to tighten further as it focuses on taming price pressures from the war-induced energy shock. However, policymakers offered few clues on the timing of the next move. Sweden’s crown weakened after the Riksbank held ⁠its policy ​rate unchanged. The central bank said the Iran war had intensified inflationary pressures, raising the likelihood of a future ​rate hike, while also noting that underlying inflation remained subdued and economic activity was somewhat below normal.

STERLING STEADY AS TRADERS ASSESS US-IRAN DEAL, FOCUS TURNS TO UK DATA AND BOE

Sterling held steady against the U.S. dollar on Tuesday as traders weighed the U.S.-Iran interim agreement to end the Middle East conflict and focused on key UK economic data and the ​Bank of England’s interest rate decision. U.S. President Donald Trump said on Monday a preliminary ‌deal to end the conflict had been signed by the U.S. and Iran, but some uncertainty persisted as details were not immediately public and shippers said it could take weeks for confidence to return and regular shipping to ​resume after the reopening of the Strait of Hormuz While global markets seemed somewhat optimistic ​about the prospective deal and oil prices fell, the reaction in currency markets ⁠was relatively muted. The U.S. dollar was last little changed against a basket of its major peers, ​and sterling was virtually flat against the greenback on the day at $1.3416. Traders looked ahead to Wednesday’s UK May inflation data, which is expected to come in at 3% on an annual basis according to a Reuters poll. Fresh labour market data and retail ​sales figures are also due later this week. Meanwhile, the Bank of England is expected to keep interest ​rates on hold when it announces its latest monetary policy decision on Thursday. “The drop in energy prices after the U.S. and ‌Iran ⁠struck a deal to reopen the Strait of Hormuz will come as a relief to the majority of the Monetary Policy Committee (MPC), who we suspect had little appetite to raise interest rates,” Andrew Wishart, senior UK economist at Berenberg, said in a note. The oil price futures curve is now ​broadly in line with ​the most benign of ⁠three scenarios that the MPC set out at its last meeting,” Wishart said. Traders will look for cues from policymakers on the rate outlook, with money markets most ​recently pricing in about one interest rate hike from the BoE by ​year-end after scaling ⁠back expectations for increases in recent days. Also on Thursday, Greater Manchester Mayor Andy Burnham will stand in the Makerfield by-election, which could pave his way back to Westminster for the Labour Party. Should Burnham win ⁠in ​Makerfield, he could challenge Prime Minister Keir Starmer for the ​party leadership which may trigger renewed political and fiscal policy uncertainty. Both are broadly viewed as potential headwinds for Sterling.