FX Market Update: Dollar Pullback, Euro Recovery, and Sterling Steadiness Ahead of Key Data.

• USD – Remains broadly supported but is easing back from Friday’s rally as risk sentiment improves. Focus now shifts to key US inflation data and Fed rate expectations.

• EUR – Benefiting from the softer dollar and improved market sentiment, with attention turning to Thursday’s ECB decision.
  

• GBP – Holding a firmer tone against both USD and EUR, though with little domestic data to drive direction ahead of Friday’s GDP release.

USD:

The dollar has been gradually surrendering some of the gains made during Friday’s strong rally, as market sentiment has improved modestly. A partial recovery in technology stocks and the easing of tensions between Israel and Iran have helped support risk appetite, reducing demand for the safe-haven greenback and providing a lift to European currencies.

Attention now turns to a busy run of US economic data. Today’s NFIB Small Business Optimism Index and ADP employment report offer an early indication of economic momentum, while tomorrow’s CPI release and Thursday’s PPI figures will be the key focal points. Markets remain highly sensitive to any data that could alter expectations for Federal Reserve policy ahead of next Wednesday’s rate decision. As a result, the dollar’s near-term direction is likely to remain closely tied to evolving interest rate expectations.

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EUR: 

The euro has edged higher against the dollar as improving risk appetite and a softer USD backdrop have supported the single currency. EUR/USD has been gradually advancing since the start of the week, while EUR/CHF has continued its recent gains, extending its June rally beyond 1%.

For now, attention remains firmly on US economic releases, which are likely to dictate broader market direction over the next two sessions. However, the focus will quickly shift to the European Central Bank meeting on Thursday. Any guidance from policymakers regarding the outlook for growth, inflation, and future rate adjustments will be closely scrutinised. In the absence of major surprises, the euro appears reasonably supported, although gains may remain measured until the ECB provides fresh direction.

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GBP: 

Sterling is trading higher against both the euro and the dollar this morning in relatively quiet market conditions. With the UK economic calendar largely empty until Friday’s GDP release, external drivers are likely to play a greater role in determining direction over the coming days.

US inflation data and Thursday’s ECB meeting are expected to be the dominant market events for sterling traders. On the domestic political front, attention is beginning to turn towards the upcoming Makerfield by-election, while reports suggest Prime Minister Starmer has been working to consolidate support among ministers amid speculation of a future leadership challenge. For now, however, sterling is taking its cues primarily from broader market sentiment and international developments rather than UK-specific catalysts.

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