If your business carries exposure across sterling, euros or dollars, May was an active month. All three shifted on the back of Middle East instability, softening eurozone growth forecasts and UK political uncertainty. Going in June, those drivers remain active, with three certain bank meetings scheduled across all three currencies.
What happened in May?
- The dollar strengthened against both the euro and pound, gaining around 0.8% versus the euro and nearly 1% against sterling. Ongoing uncertainty around the Middle East, and repeated setbacks in peace negotiations, supported demand for the dollar as a safe haven.
- The euro weakened as the economic cost of sustained conflict became clearer. Updated forecasts pointed to slower growth alongside rising inflationary pressure, undermining confidence in the region’s outlook.
- Sterling also came under pressure, with domestic political uncertainty adding to the global backdrop. Local election losses raised questions around stability, creating additional headwinds for the currency.
For businesses, these moves are already feeding through. A stronger dollar increases input costs for USD-denominated purchasing, while weaker European currencies reduce the value of overseas revenues when repatriated. At the same time, increased volatility is making pricing and forecasting more difficult.
What’s in store in June
The pound
The situation in the Middle East remains the dominant driver. Continued disruption, particularly around the Strait of Hormuz, is keeping oil and gas prices elevated and adding to inflationary pressure. This increases the likelihood of monetary policy action.
The Bank of England’s next decision falls on 18 June, with expectations split between a one-off rate hike and a continuation of its current holding pattern. Either outcome has implications for GBP volatility.
Political risk may also come into play, with the Makerfield by-election on the same day. Any outcome that raises the prospect of further leadership instability could weigh on sterling.
For businesses exposed to GBP, this creates a mix of upside and downside risk, particularly where costs or revenues are sensitive to both energy prices and interest rate expectations.
The euro
Economic forecasts for the eurozone continue to soften, with growth expectations revised down and inflation projected to rise further over the coming months.
Markets are increasingly pricing in a rate hike from the European Central Bank at its June meeting. While higher rates can support a currency, the underlying weakness in the regional economy complicates the outlook for the euro.
For corporates, this creates uncertainty around direction rather than just volatility, making hedging decisions more complex.
The dollar
The US remains relatively insulated from the direct economic effects of the conflict, which has supported the dollar. However, political pressure is building domestically, particularly as higher fuel costs impact consumers.
With midterm elections approaching, the administration is incentivised to see progress on geopolitical stability. In the absence of a breakthrough, however, the Federal Reserve is unlikely to shift policy at their June meeting.
Any meaningful progress towards a peace agreement could reduce safe-haven demand and trigger a pullback in the dollar, introducing a different kind of volatility into the market.
The takeaway?
The drivers that shaped May’s currency moves remain active heading into June. With three scheduled decisions across the Fed, the Bank of England and the ECB, the picture is unlikely to be clearer by the end of the month. or currency-exposed businesses, this means greater uncertainty around costs, revenues and pricing, as well as a growing need to actively manage FX risk rather than absorb it. We’ll cover the outcomes of June, and what they mean, in next month’s briefing.
