USD: Inflation cools, but focus returns to oil
The US dollar starts a new week with softer Fed pricing, but not a clean weak-dollar setup. Last week’s CPI and PPI reports both came in below expectations, helping pull front-end Treasury yields lower and cooling near-term Fed hike risk. The 2-year yield fell back toward 4.18% after touching a one-year high near 4.29%, while the 10-year eased from its July 13 high near 4.63% to around 4.55%. The move left markets with a less hawkish Fed path, but the dollar’s decline stayed contained outside oil-sensitive currencies.
The inflation data did not make a strong case for more tightening. Headline CPI fell in June, core CPI was flat, and PPI followed with a downside surprise of its own. That supports the view that peak Fed hawkishness may be behind us, with the central bank more likely to stay on hold through the second half of the year. Still, one week of softer data does not settle the inflation debate. Fed Chairman Kevin Warsh’s pushback against any “mission accomplished” reading should keep markets careful.
Oil is now the main short-term risk. Brent has touched $90 a barrel, and WTI is firmer as the US and Iran continue tit-for-tat strikes. As further escalation in the Middle East has lifted crude again, higher gas prices could revive concerns about energy feeding into core inflation. That would push markets back toward the uneasy pre-June inflation-print setup, where Fed expectations swing with each shift in the geo-economics backdrop. This keeps the higher-for-longer Fed path in play and could put a defensive bid back under the dollar if equity risk appetite weakens.
Equities will also matter more this week. Oil prices and earnings results are likely to set the tone after last week’s mix of softer inflation, tech-sector swings and rising geopolitical uncertainty. Investors are watching whether crude retreats or gasoline moves decisively higher, while earnings will test whether heavy AI-related spending is translating into stronger profits. Recent weakness in parts of the technology complex has shifted the mood from exuberance toward more skepticism. If that turns into broader risk aversion, the dollar could find support even with lower Fed hike expectations.
The dollar’s near-term direction now depends on which force wins out. If Middle East risks fade and oil stabilizes, softer inflation should leave the greenback more vulnerable as markets lean further away from Fed tightening. If crude keeps rising, especially above $90 a barrel, and stocks come under pressure, the dollar may hold a bid from both inflation-risk repricing and safe-haven demand. For now, the data story points mildly lower for the dollar, but geo-economics is limiting the downside. That leaves the new week less about last week’s inflation relief and more about whether oil lets markets extend it.
What’s happening in markets this week?
This new week opens with geopolitics back in the foreground after the latest escalation in the US-Iran conflict. On Monday, markets will watch China’s loan prime rates, Andy Burnham being sworn in as UK prime minister, the US leading index and Canada CPI. Tuesday brings New Zealand CPI, the German ZEW survey and the UK jobs report, giving investors a broader read on inflation, confidence and labor conditions. By Wednesday, focus shifts to Japan’s 40-year bond auction, UK CPI, the US 20-year auction and earnings from Alphabet and Tesla, two of the week’s biggest tests for AI sentiment and equity risk appetite.
Thursday is centered on Australia’s jobs report and the ECB rate decision, with the central bank widely expected to stay on hold while investors look for clues on September
Friday rounds out the week with Japan CPI, euro-area and UK flash PMIs, UK retail sales, US flash PMIs and US new home sales. The PMI data will be important because markets need to see whether services can stay firm while manufacturing tries to recover.
Earnings will also stay in focus after last week’s strong US bank results, with markets watching Alphabet, Tesla, IBM, ServiceNow, Texas Instruments, Intel, Verizon, American Express and SLB.
With the Fed in blackout ahead of its July 28-29 meeting, oil prices, earnings, sovereign bond demand and the Moonshot AI Kimi K3 story may carry more weight than usual in shaping the Dollar, yields and broader risk sentiment.
CAD: USD/CAD rebounds after Canada CPI
Canada’s June CPI came in cooler at the headline level, slowing to 2.8% y/y from 3.2% in May and slightly below the 2.9% consensus. Prices fell 0.4% m/m on a non-seasonally adjusted basis, the largest monthly decline since December 2024. Gasoline did most of the work, rising 20.5% y/y after a 33.2% gain in May and falling 10.2% on the month as oil prices eased during June. Excluding gasoline, inflation held steady at 2.2%, which leaves the broader disinflation story more mixed than the headline suggests.
The Bank of Canada’s preferred core measures also cooled, which should help keep policymakers patient. CPI median slowed to 1.9% y/y from 2.1%, while CPI trim eased to 1.8% from 2.0%. Still, core CPI excluding food and energy edged higher to 1.8% y/y from 1.6%, and travel-related prices accelerated as World Cup demand lifted accommodation, airfares and travel tours. That mix explains why markets raised expectations for a rate hike by year-end, even as the broader view remains that the BoC stays on hold through 2026.
USD/CAD has moved back up toward 1.405. The headline decline helps the BoC’s patience case, but sticky pockets in services and the market’s higher year-end hike pricing limit how dovish the report looks. More importantly for spot, yield differentials remain the main driver, especially after last week’s weaker US inflation prints pulled the pair lower. For now, USD/CAD is still trading in a range where US rates, Fed expectations and oil swings will keep bringing in more volatility than domestic data.
EUR: ECB optionality to limit euro’s gains
EUR/USD spent most of July going nowhere fast. The pair has edged higher from its late June low of 1.1350, its lowest level in a year, but the recovery has looked more like a reflection of fading dollar strength than a convincing vote of confidence in the euro itself. The main forces weighing on the pair remain unchanged: Fed policy expectations and geopolitical risk.
Softer US inflation data has tempered some of the Fed’s hawkish appeal, while renewed tensions in the Middle East continue to be viewed as tit-for-tat exchanges within a broader negotiation framework, failing to trigger panic mode just yet. The euro’s softer tone against risk-sensitive commodity currencies such as the CAD, NZD, and AUD into the London open reinforces that view.
Meanwhile, we doubt this week’s ECB meeting will provide much directional impetus for the euro. Given the still highly uncertain geopolitical backdrop, Lagarde is likely to focus on preserving flexibility and maintaining full optionality.
The two-year OIS swap rate is sitting just above its level at the ECB’s June meeting, as renewed tensions around the Strait of Hormuz have prompted markets to unwind their earlier dovish repricing. The scope for additional euro upside therefore appears more constrained.
In the coming days, the 1.1350-1.1400 zone should continue to provide support for EUR/USD. That said, with oil trading at its highest level since the US and Iran agreed to a ceasefire, any harsher rhetoric this week suggesting an end to the negotiation process would likely revive risk-off sentiment more forcefully, weighing more heavily on the euro. The underlying bias therefore remains bearish.
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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.
