US Dollar Gains on Iran Tensions as ECB Rate Hike Expectations Rise and UK Manufacturing Surges

Key Highlight

• Rising tensions in the Middle East have increased market uncertainty after Iran suspended communications with the US and warned of possible action affecting the Strait of Hormuz.
• The US Dollar strengthened as investors sought safe haven assets and stronger than expected US manufacturing data reinforced confidence in the US economy.
• Markets are now fully pricing in an ECB rate hike at the June meeting, providing support for Euro expectations.
• UK manufacturing activity reached its strongest level in four years, although some of the improvement may reflect businesses bringing forward orders and stockpiling.

Market Recap

Risk sentiment weakened as hopes for progress between the US and Iran faded. Iran halted diplomatic exchanges with Washington in response to Israel's actions in Lebanon and issued warnings of potential retaliation, including threats involving the Strait of Hormuz, a key global energy shipping route.

This geopolitical uncertainty encouraged investors to move into the US Dollar, which also benefited from stronger than expected US economic data. The latest ISM Manufacturing Index rose to 54, ahead of forecasts, while new orders showed further strength, indicating continued resilience in the manufacturing sector.

The Euro came under modest pressure despite growing expectations that the European Central Bank will raise interest rates at its upcoming meeting. Inflation remains a key focus for policymakers, with ECB officials highlighting concerns that price pressures could become more deeply embedded across the economy.

Sterling posted gains after UK manufacturing PMI data climbed to 53.9, its highest reading in four years. However, some analysts believe this strength may have been boosted by companies increasing inventories and placing orders ahead of potential supply disruptions linked to geopolitical developments.

Market Overview

Attention turns to the latest Eurozone inflation figures, which are expected to show a further rise in both headline and core inflation. With markets already fully pricing an ECB rate increase, stronger than expected inflation data would reinforce those expectations and could provide support for the Euro. Conversely, a softer reading may trigger a larger market reaction given current positioning.

In the US, JOLTS job openings data will offer another insight into labour market conditions ahead of Friday's payrolls report. A stronger result would support the view that the US economy remains resilient, while weaker numbers could ease expectations for further policy tightening.

UK mortgage approvals are also due for release. While the data is unlikely to have a major impact on Sterling, it will provide a useful snapshot of housing market activity and the broader economic backdrop facing the Bank of England.

Despite a busy economic calendar, developments in the Middle East remain the biggest market risk. Any escalation involving Iran or disruption concerns surrounding the Strait of Hormuz could quickly overshadow economic data and continue to drive demand for the US Dollar.

02nd June 2026

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