Dollar weakens despite oil rally: safe-haven appeal fades
The DXY sank to fresh 2025 lows yesterday, touching 97.602 and struggling to hold the 98 handle. Surging oil prices—up as much as 12% on Friday amid escalating geopolitical tensions in the Middle East—have further exposed the dollar’s fading safe-haven appeal. A clear divergence is taking shape: oil rallies, yet the dollar fails to follow. This underscores how sentiment toward the US economy is acting as a stronger drag than what has historically been a dollar-positive force—higher oil prices, especially in periods of geopolitical risk. The result? Renewed selling pressure as confidence in US assets continues to erode.
The dollar’s only meaningful support for now remains a hawkish Fed, now back in full alert mode – leaving those softer CPI prints in a distance past. Whether tariff-induced or driven by surging oil prices looming inflationary pressures put the Fed in a tougher position to deliver the rate cuts sought by the Trump administration—reinforcing the case for policy to remain steady for now.
The Fed remains highly cautious about tariff-related inflation, prioritizing it over growth concerns, with softer prints keeping a firmly dovish shift at bay. Retail sales, out today, are expected to disappoint—likely showing contraction, particularly in discretionary categories, as real income continues to be squeezed. Meanwhile, continuing jobless claims, set for release on Wednesday, continue to tick higher. But it will be import prices, due later today, that will command the Fed’s attention. Since these prices exclude tariffs, any positive percentage change would signal that US trading partners are not absorbing the tariff costs, leaving US importers to bear the burden—a red flag for a Fed intensely focused on inflation risks.
Before the conflict escalated, expectations had been set for a more positive news cycle this week with the G7 summit in Alberta, Canada. However, the war in the Middle East quickly dominated discussions, reportedly prompting President Trump to leave early and calling for the evacuation of Tehran—contrasting with earlier optimism that Israel-Iran tensions would not escalate. This unexpected shift raised concerns about G7 unity in addressing global challenges, from trade to geopolitical risks, adding pressure to U.S. and European markets. While the start of the summit has been disappointing for the dollar, more supportive trade-related news is still expected in the days ahead.
Breaking correlations: why the euro defies oil price pressure
The EUR/USD rally has gained further momentum, with the pair now trading more convincingly in the $1.15 zone. Yesterday morning, ECB Vice President Luis de Guindos provided fresh fuel for the move, expressing conviction in a “balanced inflation” outlook for the euro area, which is unlikely to undershoot expectations. His remarks eased deflationary concerns, reinforcing the case that the ECB is nearing its inflation target. The hawkish tone propelled the pair toward the $1.16 handle.
In the broader geopolitical context, such remarks may have led markets to interpret rising oil prices, driven by intensified Middle East conflicts, as a further deterrent to ECB rate cuts for the remainder of the year—reinforcing hawkish sentiment and supporting the euro.
Another key factor in the euro’s rally was the muted response in USD, despite heightened geopolitical tensions. Among the G10 countries, the euro is one of the most sensitive to declines in the dollar. Normally, higher oil prices would pressure the energy-dependent euro zone, while benefiting the dollar via safe-haven flows or the oil-price surge channel. However, in today’s highly sentiment-driven market, traditional correlations appear to have broken down, amplifying euro flows as markets recognized lackluster dollar demand, despite otherwise USD-positive developments.
Germany’s ZEW sentiment indicator is the euro area’s key event today—and possibly for the week. The Bloomberg survey projects an increase to 35, up from 25.2, driven by optimism over Germany’s fiscal loosening. The federal cabinet is set to approve the draft 2025 budget and the first tranche of the €500 billion off-budget infrastructure fund later this month. While the release is unlikely to drive significant euro appreciation, a stronger print could support its momentum, providing a much-needed domestic catalyst for euro upside, today predominantly shaped by US sentiment.
Sensitive sterling requires sustained risk appetite
The British pound clawed back Friday’s losses, nudging back toward the $1.36 handle against the US dollar to kick off what promises to be a pivotal week. The dollar’s failure to hold safe-haven demand, despite deepening Israel-Iran tensions, underscores shifting Fed expectations and crowded USD positioning.
That said, sterling tends to be less reactive to broad USD weakness than other G10 currencies, and despite intensifying Bank of England rate cut expectations, fuelled by another wave of weak UK data last week, the pound is holding its ground. The $1.36 handle is still proving a barrier to the topside though.
From a wider lens, looking at other GBP pairs and asset classes, we deduce that the easing geopolitical tensions (witnessed on Monday) guided sterling via the oil and risk sentiment channels. The over 2% drop in oil prices and renewed global risk appetite, evidenced by equities bouncing back and the VIX volatility index falling back to 20, helped the pound appreciate against typical safe haven peers like JPY and CHF. However, other risk sensitive peers such as NZD, AUD and ZAR made a stronger start to the week. These trends have already been flipped on their head though amidst Trump’s social media post on Tehran.
Meanwhile, GBP/EUR has been grinding lower since the start of the month, taking out its supportive key daily moving averages. Holding above €1.17 will be crucial or else an extended slide towards €1.16 or lower before month-end could be on the cards.
A stronger euro is obviously a drag on GBP/EUR, but it could bode well for GBP/USD. This is because EUR/USD is the most liquid and widely traded FX pair, and moves can often spill over into GBP/USD. So, while GBP/USD has its own UK-centric drivers, like BoE policy, growth data, and domestic politics, it doesn’t move in isolation. When EUR/USD makes big moves, GBP/USD often gets caught in the current. Hence, if EUR/USD can break and hold above $1.16, this could be the catalyst needed for GBP/USD to make a decisive move above $1.36.
Euro gains across crosses
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 16-20
All times are in BST
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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.
