USD: Fed questions and coordinated intervention
The dollar’s post-FOMC rally continues to fade as markets become less convinced that Chair Warsh’s hawkish rhetoric will ultimately translate into tighter policy. The DXY remains under pressure following last week’s sharp squeeze lower, with reported Japanese intervention and lingering doubts over the Fed’s willingness to follow through on its inflation concerns all weighing on sentiment.
The yen has strengthened roughly 4% against the dollar over the past three trading days, but the relatively modest move in USD/JPY suggests that one round of intervention is unlikely to be enough to force a lasting unwind of the highly profitable yen-short trade that has dominated FX markets for much of the past four years. More notably, Washington’s willingness to coordinate with Tokyo may be interpreted as a subtle shift towards a weaker-dollar preference, a theme that gained traction last year amid concerns that a strong greenback was undermining US manufacturing competitiveness. With speculative dollar longs sitting near record highs, the risk of a broader position squeeze has increased.
Cross-asset price action reflects that shift. The US yield curve has steepened further, but largely because inflation expectations are rising rather than real yields. A weaker dollar alongside a steeper curve suggests investors are becoming less confident that the Fed will deliver the tightening path implied by last month’s hawkish messaging.
That said, the broader picture is not unequivocally dollar negative. The latest flare-up between the US and Iran continues to support oil prices and underpin a degree of safe-haven demand, while frail risk sentiment may be preventing a deeper correction in the greenback. Moreover, last week’s Q2 GDP report reinforced the view that US demand remains resilient, despite softer inflation data.
The key question is whether the recent dovish repricing can be sustained. If inflation continues to cool, markets may increasingly conclude that an extended pause is justified, putting further pressure on the dollar. However, upcoming data will be critical. This week’s ISM surveys, JOLTS report and non-farm payrolls will provide an important test of the US growth story.
EUR: EUR/USD breaks higher, jobs report the next test ahead
EUR/USD rallied to mid-June highs last week after spending most of July hovering timidly around the 1.14 mark.
The main driver was month-end narrowing in EUR-USD rate differentials. The Fed’s July policy meeting failed to satisfy hawkish expectations, while stronger-than-expected eurozone GDP and inflation data reinforced the ECB’s hawkish bias, keeping the euro supported.
Even so, more meaningful EUR/USD upside hinges on de-escalation momentum in the Middle East regaining traction. Until oil prices start falling more decisively, the euro is likely to remain weighed down by growth concerns and deteriorating terms of trade. A hawkish Fed remains a key obstacle as well.
As a result, we continue to view any EUR/USD upside as tactical for now, with the broader backdrop remaining supportive of the dollar.
This week, the US jobs report and broader geopolitical sentiment will be key. A material downside surprise in labour market data should help EUR/USD consolidate around current levels.
GBP: August isn’t sterling’s friend
Sterling enters the new week/month on a relatively weaker footing after a decent performance last week. Much of the advance last week reflected USD weakness rather than a meaningful improvement in UK fundamentals. GBP/USD briefly pushed back towards 1.35 before settling around 1.34, while GBP/EUR remained broadly contained below 1.17 after retreating from the one-year highs seen earlier in July.
Importantly, the recent pullback in GBP/EUR still looks corrective rather than trend-breaking as it remains comfortably above its rising 100-day moving average. The key question now is whether the market has sufficiently unwound the overbought conditions that characterised July’s rally.
With no major UK or eurozone data releases due this week, global drivers are likely to dominate. That may leave sterling exposed, given its domestic support has become less compelling. Earlier in the summer, the pound benefited from a favourable combination of carry demand, hawkish BoE pricing and easing political risk. More recently, however, expectations for further BoE tightening have moderated and gilt yields have drifted lower, reducing the attractiveness of sterling’s yield advantage.
Performance trends reflect that shift. Sterling has generally outperformed funding currencies this year but struggled against commodity-linked peers, although falling energy prices temporarily flipped that dynamic last week.
Looking ahead, seasonality also presents a challenge. Over the past 20 years, GBP/EUR has fallen in August 60% of the time, while GBP/USD has declined in 65% of Augusts, averaging a loss of around 0.7%. With sterling’s carry advantage under greater scrutiny and momentum fading, the pound enters a historically difficult period with risks tilted modestly to the downside.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 03-07
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.
