USD: Finds it footing before payrolls
The US dollar started the week on the back foot as reports of progress between Iran and Oman on reopening shipping routes through the Strait of Hormuz drove oil prices sharply lower and improved risk sentiment. That encouraged a rotation into higher-beta currencies and reduced some of the geopolitical premium embedded in the greenback.
Today’s payrolls report is now the key focus. Markets view the release as largely binary: another weak reading would strengthen the case for a prolonged Fed pause, while a stronger print would reinforce the view that June’s softness was an anomaly and revive expectations of further tightening.
That focus on rates has already started to reassert itself. Despite Brent falling as much as 12% at one stage this week, Fed pricing barely shifted, with investors continuing to assign meaningful odds to another hike later this year. Hawkish comments from several Fed officials, alongside reports that Chair Warsh would consider raising rates if inflation remains firm, have helped push short-end Treasury yields higher and restored the relationship between the dollar and rates.
The broader macro backdrop remains supportive. US services activity continues to signal resilient growth, driven by AI-related investment and robust consumer spending.
Bottom line: the dollar weakened early in the week as oil fell and geopolitical tensions eased. It is strengthening again as markets refocus on the prospect of higher US rates and resilient US growth. Payrolls are the next major test of that narrative.
EUR: Pulls back from 7-week peak
The euro has softened towards the end of thid week, with EUR/USD slipping back toward 1.15 as a rebound in oil prices and hawkish Fed commentary have revived demand for the dollar.
The move highlights a familiar theme: while the eurozone growth backdrop is improving, it remains vulnerable to higher energy costs. German factory orders rose 3.1% in June, extending a run of encouraging data that includes stronger GDP, PMIs and business confidence. Together, these suggest Europe’s largest economy is finally gaining some traction after a prolonged slowdown.
However, the recovery remains fragile. Higher energy prices continue to weigh on the outlook for energy-intensive industries, while low Rhine river levels pose an additional logistical challenge for manufacturers.
As a result, EUR/USD finds itself caught between improving domestic fundamentals and a more challenging external environment. While recent data support the case for eurozone resilience, the combination of rising oil prices, a firmer dollar and renewed Fed hawkishness has shifted the near-term balance of risks back to the downside.
For now, the euro’s recovery remains intact, but momentum has clearly faded as markets refocus on energy and rates.
GBP: Beholden to external forces
Sterling has delivered a mixed performance this week, gaining against commodity-linked currencies such as the NOK as oil prices fell, while lagging higher-beta peers including the SEK and AUD amid improving risk sentiment.
GBP/EUR has consolidated in the upper 1.16s after retreating from July’s one-year highs above 1.18, as narrowing UK-eurozone yield differentials reduce support from the rates channel. Meanwhile, GBP/USD remains trapped within the broad 1.32-1.35 range that has defined much of 2026 and is still slightly lower on the week despite a softer dollar backdrop.
That lack of direction is reflected in options markets, where implied volatility remains below its long-term average in what is now the second-longest such stretch in a decade.
With domestic fundamentals failing to generate much FX traction, today’s US payrolls report is likely to be the key driver of GBP/USD. A softer labour market print could support another push towards the top of the recent range, while a stronger reading would reinforce the dollar’s relative advantage.
Looking ahead, next week’s US CPI release may prove even more important, with inflation data likely to determine whether recent dollar softness extends or reverses. For now, sterling remains increasingly driven by the dollar, risk sentiment and energy prices rather than UK-specific factors.
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Calendar: August 03-07
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
