USD: Markets demand proof
The US dollar’s rally lost momentum last week after a softer‑than‑expected US jobs report triggered a modest pullback, reflecting a market that is becoming increasingly demanding of data capable of justifying a more hawkish Fed outlook. With oil prices easing from their recent peaks and immediate inflation fears moderating, investors have become less willing to chase dollar strength on policy expectations alone.
Yesterday’s ISM Services survey offered little fresh proof. The headline index and prices-paid component were broadly in line with expectations, with softer new orders offset by a stronger employment reading. Overall, the report does little to alter the prevailing picture of a US economy that remains resilient but not accelerating.
That leaves markets focused on bigger themes. June’s hawkish FOMC meeting remains the primary driver behind the dollar’s resurgence, but again, investors are becoming increasingly demanding of data that can justify a higher-for-longer policy path. In this sense, the reaction to the payrolls report last Friday was telling. The sharp decline in short‑dated Treasury yields and the dollar highlighted how aggressively markets had priced the prospect of further Fed tightening following June’s hawkish FOMC meeting. While Chair Warsh’s emphasis on price stability initially reinforced that repricing, part of the move reflected relief that he would not immediately succumb to political pressure for lower rates. As that relief premium fades, investors are paying closer attention to incoming data and appear more willing to unwind tightening expectations when the economic backdrop disappoints.
For now, however, the broader backdrop remains supportive. US growth continues to compare favourably with most major economies, while inflation remains elevated enough to keep the Fed cautious. That combination should help underpin the dollar, even if the pace of gains slows.
EUR: Consolidating, not recovering
Although the euro managed to rebound against the US dollar last week, the broader picture remains one of consolidation rather than recovery. EUR/USD continues to trade below its 21-day moving average near 1.1470, keeping the downtrend in tact that has been in place since April’s peak near 1.1850.
The main driver remains monetary policy repricing. As geopolitical risks have faded and oil prices retreated, markets have steadily scaled back expectations for further ECB tightening. Last week’s Eurozone inflation data reinforced that shift, with softer core and services inflation suggesting second-round effects from the energy shock are proving more limited than initially feared. As a result, the case for an extended ECB pause continues to strengthen, with the probability of a September hike now below 50%.
That said, the euro is not without support. Lower energy prices are also feeding into the US inflation outlook, raising doubts over how much further Fed tightening expectations can realistically extend. While the stronger US macro backdrop continues to favour the dollar, markets are becoming increasingly sceptical that the Fed will need to deliver additional rate hikes later this year.
For now, EUR/USD appears trapped between these competing forces. A light economic calendar this week is unlikely to provide a decisive catalyst, leaving central bank rhetoric as the main focus. Comments from ECB policymakers, including Isabel Schnabel and Philip Lane, will be watched closely for signs that policymakers are becoming more comfortable with the inflation outlook.
Meanwhile, the euro’s relative underperformance is also visible elsewhere in FX. GBP/EUR has broken to its highest level of the year, reflecting the ongoing unwind of ECB tightening expectations and the broader shift in relative growth and rate dynamics. While sterling has its own domestic challenges, the move reinforces the view that recent euro weakness is not solely a dollar story, but also reflects fading confidence in the euro area’s ability to outperform as inflation pressures ease and the ECB’s tightening cycle nears its end.
GBP: Pound’s recovery faces key test
Sterling has started July on a firmer footing, with GBP/USD rebounding from a seven-month low near 1.3150 to the mid-1.33s, delivering a gain of more than 1% last week. The move has been driven primarily by the USD side of the equation, following a softer-than-expected US labour market report that challenged the increasingly crowded US exceptionalism narrative.
That said, the broader backdrop remains nuanced. Markets continue to price roughly one additional Fed rate hike, largely reflecting inflation concerns, while US yields remain elevated. As a result, the balance of macro risks still leans modestly in favour of the dollar, even if last week’s data weakened the near-term bullish USD narrative.
Technically, sterling is showing tentative signs of stabilisation. GBP/USD has reclaimed its 21-day moving average, an important development given that the indicator capped rallies throughout June’s decline. The move suggests short-term downside momentum is fading and that the pair may be attempting to establish a base. However, the more important test lies ahead near the 100-day moving average around 1.3407. Until that level is decisively reclaimed, the recovery is best viewed as corrective rather than the start of a broader trend reversal.
Domestically, political developments remain in focus. Markets continue to digest the implications of Keir Starmer’s departure, though attention is increasingly shifting towards the composition of a likely Burnham-led government, particularly the choice of Chancellor. For now, investors appear reassured by signs of fiscal continuity, helping contain any renewed political risk premium.
Looking ahead, the USD remains the primary driver of GBP/USD, with Wednesday’s Fed minutes likely determining whether sterling can extend its recovery or whether the recent rebound begins to fade.
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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.
