US Dollar Outlook, Iran Negotiations and Fed Expectations Drive Global Currency Markets

Key Highlight

• The US Dollar initially weakened after renewed optimism surrounding potential progress in Iran negotiations, although sentiment has since become more cautious.
• Sterling recovered against the US Dollar as risk appetite improved, despite the Bank of England maintaining a patient approach to monetary policy.
• The Bank of England signalled that it is prepared to tolerate inflation above target for a period to avoid placing further strain on economic growth.
• Markets are now focused on today's US ISM Manufacturing data, which could provide the first significant indication of US economic momentum this week.

Market Recap

Markets ended last week focused almost entirely on developments surrounding Iran. Comments from President Trump indicating he was preparing to make a final decision regarding a potential agreement encouraged hopes of a diplomatic breakthrough. This prompted a broad decline in the US Dollar, while major currencies across the G10 complex moved higher.

The prospect of easing tensions supported risk sentiment, although uncertainty remained as the US continued to emphasise key conditions including unrestricted access through the Strait of Hormuz and restrictions on Iran's nuclear ambitions.

In the UK, Bank of England Governor Andrew Bailey reinforced the central bank's cautious stance. Policymakers appear willing to accept inflation remaining above the 2 percent target temporarily rather than risk weakening economic activity through further aggressive interest rate increases. As a result, markets reduced expectations for additional rate rises this year.

Sterling benefited from the softer Dollar environment, gaining against both the US Dollar and the Euro. However, it continued to struggle against the New Zealand Dollar as investors responded positively to the Reserve Bank of New Zealand's more hawkish outlook.

Over the weekend, sentiment shifted once again. Uncertainty surrounding negotiations between the US and Iran resurfaced, helping the US Dollar recover some strength. Oil prices also rebounded from recent lows, increasing demand for traditional safe haven assets and reinforcing support for the Dollar.

Market Overview

The situation in Iran remains the primary driver of market sentiment at the start of the week. While hopes for progress briefly lifted risk appetite on Friday, investors are now awaiting clearer confirmation of whether a deal can be reached. Until then, markets are likely to remain highly sensitive to political headlines.

Any signs of negotiations breaking down could strengthen demand for the US Dollar as a safe haven asset. Conversely, evidence of a breakthrough would likely encourage investors to move back into risk sensitive currencies and reduce support for the Dollar.

Attention today turns to the US ISM Manufacturing report, due at 15:00 BST. Forecasts suggest a modest improvement in activity, while the Prices Paid component will be closely monitored for inflationary pressures. Stronger than expected data could reinforce expectations that the Federal Reserve will maintain a firm policy stance, potentially providing further support for the US Dollar.

In Europe, final manufacturing figures from Germany are expected to remain below the growth threshold, highlighting the ongoing challenges facing the Eurozone's largest economy. This may continue to limit upside potential for the euro, particularly against a backdrop of geopolitical uncertainty.

Swiss GDP figures will also be released this morning. While not expected to be a major market mover, any significant surprise could influence the Swiss franc, which has seen mixed safe haven demand during recent geopolitical tensions.

Looking ahead, the week contains several important economic releases including Eurozone inflation data on Tuesday, US labour market indicators throughout the week, and Friday's US Non-Farm Payrolls report. These events are likely to play a significant role in shaping currency market direction as investors assess the outlook for growth, inflation and interest rates heading into the summer months.

01st June 2026

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