Long USD has been the pain trade
With a U.S.-brokered ceasefire between Iran and Israel now in place, market nerves have eased noticeably. The truce, struck in direct talks between President Trump and Prime Minister Netanyahu, and accepted by Iran on the condition of non-escalation, has defused immediate concerns about a broader regional conflict.
While tensions initially spiked following the U.S. strike on Iranian nuclear facilities, fears over uncontrollable escalation have receded. Iran’s retaliatory missile strikes on U.S. bases in Qatar and other allied territories were measured and, critically, resulted in no reported U.S. casualties, helping contain the fallout. The Fordow facility remains a point of concern, as doubts persist about whether the U.S. strike caused any material damage, but that risk has been overtaken by the diplomatic breakthrough.
The Strait of Hormuz remains the one wildcard. Iran’s ability, or willingness, to disrupt oil flows through the vital chokepoint remains unclear. While a blockade would inflict global market pain, it would also harm Iranian economic interests and alienate key allies such as China, which receives over 30% of its crude from the region. For now, that the high-risk, low low-probability remains on the radar.
Meanwhile, with oil dipping below $70, volatility easing, and stocks finding their footing, it’s becoming clear: long-USD has been the pain trade in North America for the last few months. And although the medium-term bearish outlook for the dollar has slightly changed, this short-lived geopolitical jolt may have just offered US dollar bears a decent re-entry point.
Also, the recent dip in the dollar may have been amplified by Fed Governors’ commentaries. Fed Governors Bowman and Waller are now aligned in backing a July rate cut, with Bowman signaling support if inflation stays contained. Goolsbee also struck a dovish tone, noting tariffs haven’t sparked inflation as feared, suggesting the case for delaying cuts is fading. Markets responded with a modest rise in July cut odds and a sharp jump in expectations for September and year-end easing, now more in line with the Fed’s latest dot plot. Attention now turns to Powell’s Congressional testimony before the House Financial Services Committee and then repeats it on Wednesday before the Senate Committee on Banking, Housing, and Urban Affairs.
CUSMA and tariffs
Canada is weighing new tariffs on U.S. steel and aluminum as early as July 21, should trade talks with the Trump administration stall. At the same time, Ottawa is set to tighten federal procurement rules, mandating the use of domestic or “reliable partner” metals for infrastructure projects. To shield its industry further, Canada is rolling out tariff-rate quotas on steel from countries lacking trade agreements and drafting new anti-dumping measures.
These steps are part of a broader response to ongoing U.S. tariffs, 50% on foreign metals and targeted duties on Canadian steel, aluminum, and certain vehicles, which together account for over 8% of Canadian exports to the U.S. Canada currently applies 25% counter-tariffs. Both countries remain in negotiations, with a tentative mid-July deadline on the table.
While headlines often emphasize the U.S. administration’s 25% tariff on most Canadian imports (excluding energy products), the reality is more nuanced. Thanks to the Canada-United States-Mexico Agreement (CUSMA), many Canadian goods remain exempt from these broad tariffs.
In fact, as of April, the effective U.S. tariff rate on Canadian goods stood at just 2.3%, the lowest among major U.S. trading partners and one of the lowest globally. Nearly 90% of Canadian exports to the U.S. during that month entered the market tariff-free.
Following confirmation of a ceasefire between Iran and Israel, the Canadian dollar is once again hovering near the key 1.37 support level, just above its 20-day moving average. Over the past week, CAD has swung sharply, rallying from 1.354, its lowest since October, to 1.379, the highest in a month. Notably, it’s now aligned once more with the long-term upward trendline in place since 2021, reinforcing 1.37 as a key technical level to watch.
Near-term moves in the loonie will likely hinge on developments out of the Middle East, Chair Powell’s testimony to Congress, and Canada’s May CPI release tomorrow, which could all shape market direction.
Euro shakes off the shockwaves
Just like that, the geopolitical drag on the euro seems to have evaporated. EUR/USD has broken decisively above the $1.1620 zone at the time of writing, as markets shake off lingering conflict concerns. The rally began yesterday, fueled by skepticism that tensions would escalate further. Iran’s retaliatory strike on an American air base in Qatar was widely seen as symbolic—“a very weak” response, as Trump described it—with ample advance warning.
Then came the game-changer: President Trump announced a ceasefire between Iran and Israel, brokered in direct talks with Prime Minister Netanyahu. Iran agreed to the terms, conditional on Israel refraining from further strikes. Netanyahu has since confirmed Israel’s compliance in a formal statement.
With that, we can say with some conviction that the euro’s residual geopolitical drag has been fully unwound. Even if the truce is broken, the euro’s downside looks increasingly insulated for several reasons.
First, dollar strength remains elusive. Despite the U.S. assuming a more active role and oil prices rising, entrenched bearish sentiment toward the greenback is dampening its safe-haven appeal. Second, the ECB continues to provide a stabilizing anchor. While the Fed and BoE signal internal divisions, the ECB has maintained a distinctly hawkish tone. Lagarde and others have reinforced expectations that the easing cycle may be nearing its end. That persistence has helped mute the impact of softer data.
Speaking of which, disappointing eurozone PMIs briefly interrupted the EUR/USD surge, with the pair briefly slipping into $1.14 zone. June’s composite PMI held steady at 50.2, unchanged from May, confirming a loss of economic momentum. In her address to the European Parliament, President Lagarde acknowledged weakening near-term prospects based on recent survey data.
Looking ahead, with geopolitics likely to recede into the background, expect trade dynamics to re-emerge as a key driver of euro price action in the weeks ahead.
Pound rejoices as risk-off mood recedes
Cable is up nearly 1.5% from yesterday’s low of $1.3371, driven by an easing in geopolitical tensions. The rebound is hardly surprising given sterling’s high sensitivity to shifts in risk sentiment. In this environment, the pound remains more vulnerable than the euro. The ongoing debate over a potential shift (away from the US dollar) in global reserve currency status has amplified the euro’s safe-haven credentials—fueled by its defensive profile as the world’s second most-traded currency.
While structural hurdles remain to the euro supplanting the dollar, current sentiment leans euro-positive, softening its relative decline amid persistent dollar skepticism. Sterling, by contrast, lacks this buffer. In a post-Brexit world that has embedded a lasting risk premium into the pound, sterling’s sensitivity to global shocks has sharpened—exacerbating its underperformance during periods of geopolitical stress like today.
Reinforcing the trend, EUR/GBP has slipped nearly 0.20% today, as easing geopolitical tensions have provided marginally greater support to sterling than to the euro. Still, the pair remains in a clear uptrend—up 1.3% since the start of June—underpinned by a macro backdrop increasingly unfavourable to the UK. UK PMIs showed only a marginal composite uptick of 0.1, rounding out a soft Q2 picture marked by tepid growth, alongside a loosening labour market. Together, these dynamics could give the Bank of England cover to continue cutting rates—adding momentum to a rally that has defined EUR/GBP trading through June. For now, markets continue to price in two quarter-point cuts by year-end.
USD broad based weakness
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 23-27
All times are in ET
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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 quote
