At the beginning of the last week of June, US equities showed mixed performance, bonds remained steady, and the recent rally of the US dollar paused. The dollar index retreated from over two-month highs, while the Swiss franc experienced selling pressure, indicating a modest renewal of risk appetite in the foreign exchange market. Attention is now on US consumer confidence data, set to be released later today.

In recent weeks, the US dollar has become the preferred hedge against political uncertainty following the announcement of a snap election in France, which has also increased volatility in European bond markets. This preference was particularly pronounced due to the limited gains of Europe's natural safe-haven, the Swiss franc, affected by the dovish stance of the Swiss National Bank, which cut interest rates for the second time this year. In contrast, the US Federal Reserve has indicated plans for just one rate cut this year, although markets are anticipating almost two cuts, with a more than 60% probability of a move in September. This perceived hawkishness from the Fed has supported the demand for dollars in recent weeks. However, market participants are now awaiting comments from several Fed officials and upcoming data to further evaluate the monetary policy outlook. The core PCE deflator, the Fed’s preferred inflation measure, is expected to be the highlight at the end of the week, likely printing at its slowest monthly pace this year.

Therefore, short-term downside risk for the US dollar might increase if the core PCE data meets or falls below expectations. Despite this, the elevated European risk premium ahead of the French vote on Sunday may limit the upside for European currencies against the US dollar. The USD/JPY pair remains a key focus, with the potential for significant price swings as it hovers near the ¥160 level.

Thanks to a broadly weaker US dollar and a positive UK business survey, GBP/USD is climbing back toward $1.27, rebounding off its 50- and 100-day moving averages. However, the pair is still trapped in a short-term descending trend channel for the month. Meanwhile, GBP/EUR continues to defy real rate differentials, maintaining a position above €1.18 for its longest stretch since 2022.

The euro rebounded from its lower Bollinger band, marking its first daily gain against the US dollar in the past three trading sessions, and approached the key $1.0750 level, a threshold it had struggled to confidently surpass since the snap election announcement in France. European stocks rose, while government bond yields generally trended lower.