Key Takeaways

• Dollar weakens: The DXY ticked 0.1% lower in London trade, stabilizing after sliding to a one-week low overnight; on track for a 0.3% weekly loss.
• Euro near weekly high: EUR/USD hovered at its strongest level in a week, poised for its best weekly performance in over a month.
• ECB hike underpins euro: The central bank’s first rate increase in nearly three years continues to support the single currency.
• Trump signals weekend deal: The president said a peace agreement with Iran could be signed as soon as this weekend, fueling risk-on sentiment.
• Oil at two-month lows: Crude fell sharply on de-escalation hopes and expectations of supply route reopening.
• PPI mixed: Headline producer prices rose more than expected in May on energy costs; core PPI came in softer than forecast.
• Rate hike fears ease slightly: The softer core PPI pushed Fed tightening expectations toward later in the year.
• 60% December Fed hike probability: Markets maintain bets on tightening but the timing has been pushed back.
• Fed meeting next week: Rates expected to hold; focus on updated economic projections and Chair Powell’s guidance.
• Sterling little changed: The pound is on course for its best week in nearly a month despite UK GDP contracting 0.1% in April.
• UK economy shrinks: April marked the first monthly GDP decline since August — but sterling largely shrugged it off.
• Makerfield by-election looms: The June 18 vote could carry significant political implications for PM Starmer’s government.
• Bank of England next week: Widely expected to hold rates amid the difficult balancing act of stubborn inflation and slowing growth.
• AJ Bell’s Hewson: “Rising prices associated with the conflict in the Middle East are expected to continue putting pressure on a fragile UK economy in the months ahead.”

The U.S. dollar drifted lower on Friday while the euro held firm, as investors balanced growing optimism over a potential U.S.-Iran peace agreement against lingering inflation pressures that continue to cloud the Federal Reserve’s policy path.

The U.S. Dollar Index ticked 0.1% lower in London trade, stabilizing after sliding to a one-week low overnight. It was set for a 0.3% weekly fall.

Meanwhile, the euro hovered near its strongest level in a week and was poised for its best weekly performance in more than a month, supported by the European Central Bank’s first interest-rate increase in nearly three years.

Trump Signals Iran Deal Near; Oil Extends Decline

U.S. President Donald Trump said on Thursday that a peace agreement with Iran could be signed as soon as this weekend, helping fuel a broad risk-on mood across global markets.

Oil prices fell to their lowest levels in about two months on hopes of a de-escalation in tensions and a reopening of energy supply routes.

Investor sentiment was also shaped after data on Thursday showed producer prices rose more than expected in May, driven by higher energy costs linked to earlier disruptions in Middle East oil supplies. However, underlying inflation pressures were more subdued, with core producer prices increasing less than forecast.

The figures eased some concerns about an imminent Federal Reserve rate increase and prompted markets to push expectations for any further tightening toward later in the year.

Sterling Faces Political and Monetary Policy Test

Sterling was little changed on Friday but remained on course for its strongest week in nearly a month, as improving risk appetite reduced demand for the safe-haven dollar.

The pound largely shrugged off data showing the U.K. economy contracted 0.1% in April — marking its first monthly decline since August.

Yet the currency’s recent rebound remains fragile, with investors bracing for a potentially pivotal week for Britain. Attention is turning to the June 18 Makerfield by-election, which could carry significant political implications for Prime Minister Keir Starmer’s government.

The Bank of England will also meet next week and is widely expected to leave interest rates unchanged, underscoring the delicate balancing act facing policymakers as they navigate stubborn inflation and a slowing economy.

“One month’s data would usually be treated with an abundance of caution, but rising prices associated with the conflict in the Middle East are expected to continue putting pressure on a fragile UK economy in the months ahead,” said Danni Hewson, head of financial analysis at AJ Bell.

Fed Takes Center Stage Next Week

The Federal Reserve is widely expected to keep rates unchanged when policymakers meet next week, leaving investors focused on updated economic projections and Chair Jerome Powell’s guidance for clues on the timing of any future policy moves.

Markets are currently pricing roughly a 60% chance of a rate increase by December, according to the CME FedWatch tool.