The week, explained.

The euro's recent run higher hit a wall this week, with EUR/USD shedding over a cent as markets reassessed the relative pace of rate hikes on both sides of the Atlantic. Fed Funds futures now price roughly 31 basis points of net tightening through April 2027, with a coin-flip chance of a move as soon as 17 June. That is not a lot of tightening in absolute terms, but the mere possibility of the Fed acting again was enough to put a floor under the dollar.

On the European side, the picture is hardly weak. Eurozone core inflation — which strips out food and energy — came in at 2.5%, a touch above the 2.4% expected, and ECB Governing Council member Olli Rehn all but confirmed a June 'insurance' rate rise is fully baked in. Yet here lies the problem for EUR/USD bulls: both central banks are hiking, so the rate advantage that had been lifting the euro is getting harder to exploit. When both legs of a currency pair are tightening, the differential — the gap that really moves exchange rates — compresses and the trade loses conviction.

Geopolitical noise added a safe-haven bid for the greenback. Iran launched missile strikes against Israel on Sunday, halting flights at Tehran's main airport and prompting warnings of a 'crushing response' to any Israeli counter-move. In moments of acute uncertainty, traders tend to reach for the dollar as the world's reserve currency, and this week was no exception.

With euro positioning sitting near the middle of its historical range (the 43rd percentile — meaning speculators are neither especially long nor short), there is no obvious crowded trade to unwind. The pair looks likely to remain choppy: strong European data argues against a sharp fall, but a Fed that refuses to stand down limits meaningful upside too.

The pound had a muted but negative week, drifting lower as the fundamental picture on both legs remained muddy. Bank of England Governor Andrew Bailey set the tone early, acknowledging an uncomfortable stagflationary bind: UK inflation is running above target — largely blamed on the Gulf energy shock — yet the growth outlook has been downgraded, stopping just short of recession territory. That "slower, not collapsing" framing gave the BoE no obvious excuse to cut rates, but equally no clear mandate to hike aggressively. The result was a central bank stuck in the middle, and a pound with little rate-differential appeal.

Across the Atlantic, the dollar found quiet support from stubborn Fed pricing. Markets are currently assigning roughly a 50% chance of a Federal Reserve interest-rate hike by the June FOMC meeting, with futures implying around 31 basis points of net tightening priced through to April 2027. When both central banks lean hawkish, the rate-differential edge that normally drives a currency pair disappears — and cable trades on sentiment instead.

Sentiment, unfortunately, was not sterling's friend either. Geopolitical noise dominated the weekend headlines, with UK Foreign Secretary Cooper publicly calling on Iran and Israel to exercise restraint, and European leaders pressing Putin for an immediate ceasefire in Ukraine. Renewed Middle East tension kept risk appetite cautious and oil prices uncertain — the very energy-price volatility that is complicating the BoE's inflation calculus in the first place.

With CFTC data showing leveraged funds only modestly short the pound — nothing like the extreme positioning that can trigger sharp reversals — there was no technical snap-back to rescue sterling. The pair looks set to take its next cue from the US non-farm payrolls report and any further signals from Bailey, with direction genuinely hard to call until the data speaks.