The month of May has delivered a textbook example of a market caught between relief and residual anxiety. The NZD has emerged as the clear outperformer, gaining 1.39% against the greenback, while the JPY and CAD have lagged, down 1.67% and 1.56% respectively. The CHF and USD itself have barely budged, with the franc up just 0.02% and the USD flat against its own benchmark. The AUD has softened by 0.24%, the EUR by 0.61%, and sterling by 1.09%. This dispersion tells a story of commodity-linked currencies reacting to diverging energy and risk dynamics, while the major European currencies grapple with growth concerns and the lingering shadow of the Middle East conflict.
The US dollar index (DXY) has spent the month in a relatively tight range, currently hovering near 99.00 after a modest 0.93% gain over the past month but still down 0.36% on a twelve-month view. The dollar's resilience owes much to the Federal Reserve's higher-for-longer stance and the safe-haven bid that persists whenever geopolitical headlines flare. Yet the greenback has lacked the conviction to break decisively higher, hemmed in by a market that is increasingly questioning whether the peak of the dollar cycle has already passed.
The Fed at a Crossroads
The most consequential development of the month has been the transition at the Federal Reserve. Jerome Powell chaired his final FOMC meeting on April 28–29, leaving the federal funds rate unchanged at 3.50%–3.75% in a split vote that revealed deep internal divisions. Stephen Miran dissented in favour of an immediate 25-basis-point cut, while three other members objected to the inclusion of an easing bias in the statement. The decision was far from unanimous, and it set the stage for Kevin Warsh's arrival as the new Chair.
Warsh, confirmed by the Senate in mid-May, has signalled a willingness to cut rates earlier than the consensus expects — a stance that has introduced a modest risk premium into the USD. Markets are now focused on the June 16–17 FOMC meeting, which will deliver the first dot plot under the new Chair and offer a formal read on the committee's rate path. The risk for the USD is clear: if Warsh guides markets toward a more accommodative stance, the greenback could face sustained selling pressure, particularly if inflation continues to moderate from its current elevated levels. Headline CPI has been pushed above 3% by the energy shock, but core dynamics remain the key variable. For now, the market is pricing a slower path of cuts than it was three months ago, but that could shift quickly depending on the June guidance.
Oil and the Strait of Hormuz
Energy prices remain the single most important transmission channel into FX markets. The April ceasefire between the US and Iran reduced immediate tail risks, but blockades in the Strait of Hormuz continue to disrupt flows and keep oil prices elevated. West Texas Intermediate crude has risen sharply since March, and the forward curve suggests prices will remain firm for the foreseeable future.
This environment has created a complex backdrop for commodity currencies. The NZD has benefited from its relative insulation from direct energy exposure and a broader risk-on tilt in markets that have priced out the worst-case geopolitical scenarios. The AUD, by contrast, has given back some of its April gains, despite trading near four-year highs earlier in the year, as China's demand outlook and domestic growth concerns have weighed on sentiment. The CAD has suffered the most among the commodity bloc, with firm oil prices failing to offset broader risk aversion and the gravitational pull of a range-bound USD.
For the yen, the story is one of yield differentials and safe-haven fatigue. The Bank of Japan held rates at 0.75% in April, with three board members dissenting in favour of a hike to 1.00%, the largest number of dissents since 2016. Governor Ueda has maintained a cautious tone, emphasising the need to monitor Middle East developments, but the market is increasingly pricing in the possibility of further tightening. Even so, the yawning gap between Japanese and US yields continues to weigh on the yen, and the currency has struggled to find a durable bid despite its traditional safe-haven status.
Europe: Growth Concerns and Policy Paralysis
The EUR and GBP have both underperformed this month, albeit for slightly different reasons. The European Central Bank left its benchmark rate unchanged at 2.00% for a seventh consecutive meeting, with President Lagarde warning that the longer the Middle East conflict persists, the stronger the impact on inflation and growth. Surveys point to slowing activity and deteriorating confidence, and the EUR has lacked a compelling narrative to drive it higher. EUR/USD has traded in a 1.15–1.18 range for much of the year, and without a clear divergence in monetary policy or a resolution to the energy shock, that range looks set to persist.
Sterling's 1.09% decline is perhaps the more surprising move, given the Bank of England's relatively hawkish positioning. The MPC voted 8–1 to hold the Bank Rate at 3.75%, with Chief Economist Huw Pill dissenting in favour of a 25-basis-point hike. Governor Bailey has framed the energy shock as a supply-side disturbance that monetary policy cannot directly influence, but the market has taken the dovish undertones to heart. The pound had rallied nearly 3% in April, breaking key technical levels, and May's pullback looks like a natural correction in a market that is still searching for a clear trend.
UK Politics: Starmer Under Siege
The pressure on sterling has been amplified by the most serious political crisis to hit the UK government since the Truss implosion of 2022. Prime Minister Keir Starmer is facing an open rebellion within his own party following catastrophic results in the May local elections, where Labour lost control of 35 councils and nearly 1,500 councillors, roughly 60% of seats contested. The BBC's projected national vote share put Labour at just 17%, in joint third place with the Conservatives. By mid-May, over 95 Labour MPs had publicly called for Starmer to resign or set out a departure timetable, and the revolt claimed its first cabinet scalp when Health Secretary Wes Streeting resigned on 14 May, declaring he had "lost confidence" in the Prime Minister's leadership. Four junior ministers and four parliamentary private secretaries followed suit. The most significant development, however, is the emergence of Andy Burnham, the Mayor of Greater Manchester, as the clear frontrunner to succeed Starmer. Burnham, who enjoys positive favourability ratings in a political landscape starved of them, has secured the Labour nomination for the 18 June Makerfield by-election, a seat vacated specifically to allow his return to Westminster. The NEC, which had previously blocked his candidacy in Gorton and Denton, relented under pressure. Burnham is the soft left's preferred candidate and polls show he would crush Streeting by 80% to 10% among Labour members in a head-to-head contest. The critical question for FX markets is not merely whether Starmer survives, but whether any plausible Labour leader can credibly address a stalling economy and an electorate whose patience has been exhausted. The honest answer is that it is not obvious, and the market is only beginning to price in that ambiguity. A Burnham premiership would likely shift the government further left on fiscal policy, raising questions about tax-and-spend credibility at a time when gilt yields are already sensitive to political risk.
Canada: Technical Recession and a Currency Under Pressure
The CAD’s struggles deepened materially this month with confirmation that the economy has entered a technical recession. Q1 2026 GDP contracted for the second consecutive quarter, compounding a 0.6% annualised decline in Q4 2025 with a further contraction in the opening three months of this year. Full-time employment has fallen for three straight months through April, five of the past seven, with nearly 47,000 positions lost in April alone. The composite PMI has managed four gains in five months but remains below the 50 boom/bust threshold, and household balance sheets are under visible strain. The Bank of Canada meets on June 10, but the swaps market sees virtually no chance of a rate move, with expectations for even a single hike pushed out to late Q3. At the start of May, the market was pricing 60 basis points of tightening for the year; that has since collapsed to roughly 40 bp, down from a peak of nearly 80 bp in March. The loonie's weakness is not simply a USD story, though the USD/CAD correlation with the DXY remains elevated above 0.60, but a reflection of deteriorating domestic fundamentals that monetary policy appears ill-equipped to address. Governor Macklem has himself acknowledged that rate cuts may do little to counter the structural shifts now underway in the Canadian economy. With the USMCA review negotiations getting underway and Alberta set to hold an October referendum on separation that some in the Trump administration have reportedly encouraged, the political risk premium is rising alongside the economic one. The USD has advanced in 10 of the past 11 sessions against the loonie, retracing 61.8% of its March-April decline, and while it stalled near the 200-day moving average and the 1.38 handle, the technical path of least resistance remains higher.
What to Watch in June
Looking ahead, three themes will dominate the FX landscape.
First, the June FOMC meeting and the inaugural dot plot under Chair Warsh will be the defining event of the month. Markets will be parsing every word for clues on the pace and timing of rate cuts. A dovish surprise could trigger a meaningful USD sell-off, particularly against the EUR and JPY, while a hawkish hold would likely reinforce the greenback's range-bound resilience.
Second, the trajectory of oil prices will remain critical. Any escalation in the Strait of Hormuz, or conversely, a durable reopening of shipping lanes, would have immediate and significant FX implications. The commodity currencies, particularly the CAD and AUD, are the most sensitive to this dynamic, but the broader risk sentiment channel means no major currency would be immune.
Third, central bank divergence will come back into focus. The Bank of Japan's next meeting will be watched closely for any shift toward the hawkish dissents, while the ECB and BOE will face mounting pressure to clarify their paths as growth data deteriorates. The market has been remarkably patient with the current holding pattern, but that patience is unlikely to last indefinitely.
Conclusion
May has been a month of consolidation rather than conviction. The extremes of April's geopolitical panic have faded, but the underlying fragility of the macro backdrop remains. For FX dealers and corporate treasury teams, the message is one of cautious pragmatism: ranges are holding, but the catalysts for a breakout are accumulating. The June FOMC, oil price dynamics, and the evolving central bank narrative will determine whether the summer brings a renewed trend or simply more of the same sideways grind. Either way, flexibility in hedging and execution will be essential.