USD: Geopolitics and inflation data dominate
Risk sentiment continues to deteriorate, with a sea of red across global equity markets as investors digest fresh US strikes on Iran and the prospect of a prolonged conflict in the Middle East. Oil prices are up around 4%, extending their recent advance and proving the main drag on broader risk assets. Losses have been most acute in Asia, where technology shares have come under heavy pressure. Korea’s Kospi is down more than 8% despite an earlier circuit breaker, while European equities have followed lower and Nasdaq futures are trading around 1.3% in the red.
Despite the deterioration in sentiment, the cross-asset response remains relatively orderly. Bond markets are under pressure as higher energy prices push yields upward, while FX volatility remains subdued. The dollar is firmer, but the move lacks the characteristics of a classic crisis-driven scramble for safety. Instead, the greenback continues to draw support from a familiar combination of relatively high yields, resilient US growth and a Fed that remains reluctant to signal any easing bias.
Indeed, the more important USD story remains rates rather than geopolitics. Markets continue to price a more hawkish Fed path than was expected earlier this year, with around 38 basis points of tightening expected before year-end. The key risk this week is US inflation data. Given the Fed’s increasingly data-dependent approach under Chair Warsh, any upside surprise in core CPI could quickly revive tightening expectations, lifting yields and extending dollar gains.
Attention will also fall on Warsh’s first Congressional testimony as Fed Chair, alongside PPI, retail sales, consumer sentiment and the start of earnings season. While geopolitical headlines continue to dominate day-to-day trading, markets remain trapped in a familiar higher-for-longer equilibrium where elevated energy prices sustain inflation concerns, limiting the scope for lower rates and helping to keep the dollar supported.
EUR: Clinging onto 1.14
EUR/USD continued to trade in a relatively narrow range above 1.14, consolidating after rebounding from last week’s lows near 1.1325. The pair remains caught between a softer US data backdrop, which has tempered some of the Fed-driven dollar strength seen earlier in the month, and lingering concerns over the eurozone growth outlook that continue to undermine broader euro sentiment.
While the initial rise in European yields following heightened geopolitical tensions provided some support to the single currency, the euro has once again struggled to translate higher rates into sustained gains. Investors remain wary that elevated energy costs and trade-related uncertainty could weigh disproportionately on the eurozone economy, echoing concerns seen during previous periods of energy market stress. As a result, relative growth dynamics remain a key headwind for the euro, particularly against a US economy that continues to appear more resilient despite signs of moderation.
The main focus this week, alongside geopolitical developments of course, is the US inflation print. The market is largely positioned for a Goldilocks outcome that keeps the Fed on hold, which might help EUR/USD to stay above 1.14. However, technical signals remain cautious, with EUR/USD continuing to trade below its 21-day moving average around 1.1450. A benign US inflation reading would likely reinforce expectations of eventual Fed easing and could open the door for a move back towards 1.15, while a stronger-than-expected print would risk reigniting dollar strength and challenge the pair’s recent recovery.
GBP: All eyes on Burnham
Sterling opens the week near three-week highs against the dollar and one-year highs against the euro.
Andy Burnham is on course to become the next leader of the governing Labour Party on 17 July and formally assume the role of Prime Minister shortly afterwards. We see this as a UK assets-friendly development, encouraging optimism rather than anxiety about persistent political uncertainty, particularly if Burnham reiterates his fiscally disciplined approach upon taking office. The greater downside risks for the pound are more likely to emerge as we move closer to the November Budget.
Barring a stronger-than-expected US CPI report, there is therefore room for GBP/USD to grind higher this week, with initial resistance near 1.3460. First-line support is seen around 1.3350.
In GBP/EUR, the rally appears overstretched, with the pair having closed higher for 10 consecutive sessions. Momentum indicators such as the RSI are flashing overbought conditions.
Against this backdrop, days of consolidation may be due, with this week’s industrial production and monthly GDP figures the most likely catalyst. Even then, these releases are unlikely to materially alter the broader direction of travel. The overall tone should remain fairly constructive as Burnham’s path to Number 10 becomes clearer, while we doubt he will say anything that materially unsettles markets.
Some buying interest could emerge around 1.17-1.1675, as we find it difficult to see the pair moving significantly below this area over the course of the week.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: July 13-17
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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.
