Currency markets moved sharply in June as stronger US data, changing interest rate expectations and developments in the Middle East altered the outlook for major currencies.
The US dollar strengthened during the month. Better labour market data, firm demand for US equities and a more restrictive Federal Reserve stance all supported the currency. US payrolls beat expectations for a third straight month, confirming that the labour market had recovered from its weak start to the year.
Inflation concerns also returned. Markets began to price in the possibility of at least one US interest rate increase before the end of 2026. Higher expected rates made dollar assets more attractive and pushed the US Dollar Index to a one-year high.
The Federal Open Market Committee kept rates unchanged in June but removed its previous bias towards easing. It also gave no clear signal on the next policy move. Updated forecasts showed a higher expected rate of core inflation, with core personal consumption expenditure inflation projected at 3.6 per cent by the end of 2026.
The Federal Reserve’s median forecast pointed to a year-end policy rate of 3.75 to 4.00 per cent. Chair Kevin Warsh also set out a more data-dependent approach and signalled a review of how the central bank communicates forecasts and policy expectations.
Reduced guidance can make markets more reactive. Inflation, employment and growth data are likely to have a greater effect on currencies and bond yields. It may also lead to higher volatility and wider term premia as markets place more weight on each new economic release.
Geopolitical developments partly limited the dollar’s advance. Reports on negotiations between the United States and Iran caused repeated changes in risk appetite. An interim agreement to reopen the Strait of Hormuz later in the month improved sentiment and reduced pressure on energy-importing economies.
Oil prices began to fall as trade resumed. This gave some support to the euro and Japanese yen because both currencies are sensitive to energy costs. However, the effects of the Strait’s three-month closure were still working through the global economy, while the conflict in Lebanon remained a risk to the agreement.
The dollar weakened slightly near the end of June after core US inflation came in line with expectations. This reduced some of the pressure for higher rates. Lower energy prices also gave central banks more scope to treat recent inflation as temporary.
The Bank of Japan and European Central Bank both raised interest rates during the month. These decisions had already been widely expected, so they provided limited support to the yen and euro. US rates remained more attractive by comparison.
The Swiss National Bank and Bank of England left rates unchanged. Both continued to assess whether the recent rise in inflation would last.
Sterling and the Swiss franc underperformed other major currencies. The franc lost support as demand for defensive assets eased after the US-Iran agreement. Sterling came under pressure after Prime Minister Keir Starmer resigned. Expectations of a more supportive fiscal policy under Andy Burnham increased the risk premium attached to UK assets.
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