Economic Update

01 June 2026

US and Iran remain in negotiations as regional tensions persist

Over the weekend, negotiations between the US and Iran continued, although talks were interrupted by renewed attacks from both sides. The US targeted facilities in and around the Strait of Hormuz, while Iran launched missiles and drones towards Kuwait. Reports, including from the BBC, indicate that the US President is seeking amendments to the memorandum of understanding, particularly regarding Iran’s highly enriched uranium stockpile.

In Lebanon and Gaza, Israeli forces have launched further offensives, while tensions with the United Nations have also intensified. The recent optimism surrounding a potential agreement in the Middle East could fade this week in the absence of a breakthrough in US-Iran negotiations. On current evidence, both sides appear to remain materially apart on key issues.

UK political developments in focus ahead of BoE decision

A further batch of files relating to Peter Mandelson’s appointment as US ambassador is due for release today. These documents relate to his links with other countries and governments and, at face value, may prove less politically contentious. However, reporting suggests that limited assurances were sought by the UK government ahead of his appointment, which could present renewed challenges for the government.

With relatively limited economic data scheduled for release this week, attention is likely to remain on domestic political developments and external events. The Makerfield by-election, now less than two and a half weeks away, is expected to be closely contested, although Labour remains on course to retain the seat.

Sterling has edged back from recent highs against the euro, while remaining relatively firm against the US dollar.

US yields remain elevated as inflation risks persist

US equity markets have reached fresh highs, supported largely by continued strength in technology and AI-related stocks, alongside optimism surrounding a potential resolution to the US-Iran conflict. However, risks to US inflation do not appear confined to the near term, and a peace agreement, if reached, is unlikely to result in an immediate easing in price pressures.

Supply chain disruptions are likely to remain in place for an extended period, which could sustain upward pressure on inflation, policy rates and yields. Although US yields have eased over the past week and a half, long-end yields remain approximately 35–40 basis points above pre-conflict levels.

The Federal Reserve is likely to focus on whether April’s payroll growth was sustained into May. Ahead of Friday’s non-farm payrolls release, anecdotal indicators point to a further decline in job openings, alongside continued strength in ADP data. Consensus expectations are for a net NFP gain of around 90k in May, following April’s 115k increase. However, markets are also likely to place significant weight on the unemployment rate, average earnings and labour force participation.

The US dollar could strengthen this week. The Beige Book, due on Wednesday, may reiterate the persistence of inflation pressures in the near to medium term.

ECB rate expectations remain firmly priced as inflation drifts higher

Recent euro area data was limited but indicated a modest increase in both headline and core CPI inflation. Meanwhile, French Q1 GDP was revised to show a slight contraction, compared with an earlier flat reading, while Italian growth was revised higher.

The euro remained broadly stable last week, with limited movement against the US dollar, while GBP/EUR moved modestly lower after again failing to sustain a move above €1.16.

Markets now appear to be close to fully pricing a rate increase at the ECB’s 11 June Governing Council meeting. Expectations could firm further if upcoming CPI data confirms higher readings, with risks skewed to the upside for core inflation in particular.

Some ECB policymakers have also referenced the possibility of additional tightening beyond June. While this may offer near-term support to the euro, it could also weigh on growth prospects into 2026 and beyond.

CAD and MXN remain under pressure despite improved sentiment

The broader USDCAD uptrend remains intact, despite a brief interruption late last week linked to improved sentiment around a potential Gulf agreement. Canadian Q1 GDP data disappointed, showing a small contraction, following a larger decline in Q4 than previously estimated.

This week, focus turns to labour market performance and the possible ongoing divergence between the Canadian and US economies. Canada continues to underperform, despite ongoing investment activity in the natural resources sector. USDCAD could retest multi-week highs above C$1.3870, with the March high of C$1.3967 remaining in view. A further decline in Canadian employment, particularly if contrasted with modest US gains, could act as a catalyst, alongside any renewed setback in US-Iran negotiations.

The Mexican peso has continued to weaken gradually against the US dollar in recent weeks. With a limited domestic data calendar and roughly three and a half weeks until the next Banxico decision, risks appear skewed towards further softness. In the lead-up to the 25 June decision, there appears to be limited near-term data likely to provide meaningful support for the currency.

Author 

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.