Key Takeaways
- The US dollar index remains in a tight range, nearing 99.50, driven by geopolitical tensions and soft economic data.
- Canada’s July CPI beat expectations. The USD/CAD has stayed below 1.39 amid strong Canadian data and looming US tariff threats.
- The euro reached a nine-week high against the dollar but faces upward constraints due to vulnerabilities in Europe and fluctuating energy prices.
- Economic data will guide near-term FX moves. Today attention turns to industrial production and housing starts.
USD: Dollar drifts, data leads
The US dollar index posted a second consecutive day of losses, closing near 99.50, though remaining broadly confined to the hesitant 99.50-100.00 range that has been in place since early August.
Prospects for a reopening of the Strait of Hormuz suffered another setback yesterday after President Donald Trump said he was in no hurry to end the war with Iran and had no interest in extending the Memorandum of Understanding (MoU) signed in June, which has expired. Meanwhile, Israel’s renewed strikes in Lebanon, coupled with sporadic attacks on vessels transiting the Strait, have further undermined US-Iran peace prospects.
Nonetheless, FX markets appear increasingly desensitised to geopolitical headlines. FX transmission channels through oil prices and broader risk sentiment have largely broken down, allowing the more familiar rates-driven regime to reassert itself. The dollar’s subdued price action has coincided with a pullback in front-end Treasury yields from their late-July highs, as a softer run of economic data through August has tempered expectations of further Fed tightening next month.
With little Fed communication on the calendar, particularly from the anti-forward-guidance Kevin Warsh, and no clear path towards a resolution of the conflict, markets have increasingly turned back to economic data to guide near-term FX moves.
Of course, geopolitics still matters, and any significant breakthrough would quickly be reflected in prices. At the same time, ruling out further dollar upside from a hawkish repricing around upcoming event risks, including tomorrow’s FOMC minutes, the Jackson Hole symposium and key September data releases, would be premature.
Our broader view remains, however, that the Fed will stay on hold for the remainder of the year, and that an unwinding of hawkish market pricing will ultimately weigh on the dollar.
For today, markets will keep an eye out on July industrial production and housing starts data.
CAD: Short-term rally meets tariff cliff
Canada’s July CPI came in hotter than expected and gave the Loonie another source of support. Headline inflation rose 3.0% y/y, above the 2.9% consensus and up from 2.8% in June, while monthly CPI increased 0.5%. The Loonie touched the day’s high after the release, with USD/CAD trading near 1.385, its lowest level since early June. The upside surprise adds to a recent run of stronger Canadian data, from jobs to manufacturing to trade.
The inflation details were not just about gasoline. Pump prices rose 25.7% y/y, but CPI excluding gasoline held at 2.2% for a third straight month, and CPI excluding food and energy rose 1.9%, above expectations. The BoC’s preferred core measures also firmed, with the average of median and trim moving to 2.0% from 1.9%. That puts core inflation right at the BoC’s target midpoint and leaves little room for near-term easing talk.
The rate-spread channel continues to support CAD. The US-Canada two-year spread is now around 119bp, with Canada’s two-year yield near 2.99% and the US two-year near 4.18%. That spread has compressed from roughly 145bp in late July as Canadian data have outperformed and US data have softened. The combination of firmer Canadian inflation, strong July hiring and weaker US momentum has sent the USD/CAD below 1.39.
The complication is trade. The August 19 deadline for threatened 50% US tariffs on a broad range of Canadian goods is now the main near-term risk. Talks continued through the weekend, but reports suggest key disputes remain across autos, dairy, aluminum and lumber. A deal or extension of tariff talks could push USD/CAD closer toward 1.38, while an escalation could quickly send the pair back above 1.40. For now, the macro story favours CAD, but the next big move depends on whether that trade cliff is avoided.
EUR: ZEW surveys in focus today
The euro hit a nine-week high against the US dollar yesterday, although it has slipped back below 1.16 this morning. The common currency remains well supported, but its ability to extend gains continues to depend more on the dollar than developments in Europe.
Encouragingly, the relative growth backdrop is becoming less USD-positive. Recent US data, including weaker retail sales figures, have pushed US economic surprises sharply lower, while eurozone surprises have improved materially, narrowing a key divergence that favoured the dollar earlier this year.
That improving picture could be reinforced by today’s ZEW surveys. Germany’s assessment of the current economic situation remains deeply negative, having spent the longest period in contractionary territory since 2006. However, expectations for future growth have rebounded sharply from their mid-year lows and are expected to improve further. The contrast suggests investors remain cautious about present conditions but increasingly optimistic that the worst of the slowdown may be passing.
This shift has helped cement expectations for a September ECB rate hike, while the first fully priced Fed hike has been pushed out to 2027. Combined with resilient eurozone growth and easing inflation concerns, it has created a supportive backdrop for risk assets and helped underpin EUR/USD in an environment where rate differentials and risk sentiment are doing much of the heavy lifting.
However, upside remains constrained. While the correlation between EUR/USD and oil prices has weakened markedly in recent weeks as rate dynamics have taken centre stage, higher energy prices remain a structural risk for the euro area. A more meaningful escalation in the Middle East would likely refocus markets on Europe’s vulnerability to imported energy, capping gains in the euro even if the near-term rate backdrop remains supportive.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 17 – 21
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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.
