USD: Dollar awaits its next catalyst
The US dollar traded quietly yesterday while oil prices eased, with Brent crude down nearly 8% so far this week.
Markets appear to interpret the recent policy escalation by the US administration aimed at further squeezing Iran’s economy as additional evidence that military intervention is off the table, alleviating some pressure on energy prices. Reports that Iran and Oman are discussing an “interim framework” to resume shipping through the strait have added to the softness, although we would not hold out much hope given the conflict’s history. The US has yet to comment on the recent talks between the two Middle Eastern neighbours.
We see this new phase of the conflict, centred on economic pressure through policy measures, as a more reliable and durable development than renewed hopes of de-escalation.
Either way, any support for the US dollar from safe-haven flows appears limited.
Meanwhile, markets await updates on Treasury Secretary Scott Bessent’s fiscal plans and Kevin Warsh’s keynote speech on Friday. Together, they represent the clearest near-term catalysts for the dollar amid heightened market sensitivity to fiscal discipline and monetary credibility. We maintain a downside bias on the dollar ahead of Friday’s Warsh comments.
Today, markets will focus on June’s PCE price index and personal spending figures. A relatively subdued inflation reading is expected, in line with July’s headline CPI. We do not expect the dollar to react significantly, with the DXY likely to continue trading just below the 99 mark.
EUR: Ifo extends winning streak
Yesterday saw the fourth consecutive monthly increase in Germany’s flagship leading indicator, the ifo index, which rose to 88.8 in August from 86.6 in July. The index now sits at a one-year high, which is encouraging news, especially given lingering geopolitical pressures in the Middle East and tighter fiscal conditions. The more optimistic sentiment has also been consistent with the improvement in hard economic data seen in recent months, strengthening the case for a continued recovery.
For the euro, while there have been few short-term gains, the backdrop remains constructive. Since the conflict in the Middle East erupted, the ECB’s tightening bias has failed to translate into meaningful euro support, as growth concerns linked to higher energy prices have weighed on sentiment. Evidence of a more resilient economy and more contained price pressures would help restore the rates transmission channel, making a hawkish ECB suddenly appear much more credible.
On that note, ECB Executive Board member Isabel Schnabel reiterated yesterday that interest rates may need to rise further, citing upside risks to inflation from the prolonged conflict and the surprisingly strong eurozone’s economy. The euro showed little reaction, likely reflecting both Schnabel’s well-known hawkish stance and expectations that the ECB’s September decision is already leaning in that direction.
In the near term, however, another leg higher in EUR/USD remains largely a USD-driven story. The pair is consolidating in a tight 1.1650-1.17 range, with a break to the upside likely hinging on inputs from Bessent and Warsh (see USD above).
GBP: Sterling’s yield edge holds
Sterling was relatively muted yesterday. GBP/EUR remains stuck in a 1.1650-1.1700 range that has held since late July, and there appears to be no data catalyst over the next couple of weeks to push the pair decisively in either direction.
The lack of data is making markets reluctant to reprice the Bank of England more dovishly, with one 25bp rate hike still priced in by year-end. Those lingering hawkish expectations are keeping GBP’s rate advantage intact, with 2Y OIS rates the highest among the major currencies. This, in turn, continues to support the pound’s carry appeal.
We expect GBP/EUR to remain range-bound in the coming days, while GBP/USD could break above 1.3650 this week should broader dollar selling re-emerge.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 24-28
All times are in BST
Have a question? [email protected]
*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.
