USD: Fed and AI drive the week
Oil fell sharply after signs of de-escalation between the US and Iran erased much of last week’s war premium. Brent’s move away from July highs around $100 gives markets some breathing room, though energy has not fully left the inflation story. A real supply disruption would quickly bring crude back into focus. For now, attention has shifted toward the Fed, real rates and mega-cap tech, with the pause in Middle East escalation reducing, but not eliminating, the risk premium.
The US dollar remains firm ahead of Wednesday’s Fed decision. Real rates continue to rise, even as inflation expectations stay anchored and recent inflation data has softened. That leaves markets in a difficult spot: traders see fewer signs of second-round inflation, but still assign a meaningful risk to tighter Fed policy. The base case remains a hold at 3.50%–3.75%, though a hike this week has not been fully ruled out, making September even more important for the dollar and the front end of the curve.
Fed communication is adding to the uncertainty. Chair Warsh has avoided setting out a clear rate path, choosing instead to put more weight on how markets digest incoming data. That has left investors unsure whether the Fed is still guiding expectations or increasingly taking its lead from them. A hold would disappoint the hawkish side of the market, while a hike would catch the broader consensus off guard, leaving plenty of room for volatility around the statement and, especially, the press conference.
Earnings make this one of the biggest market weeks of the summer. Apple, Microsoft, Amazon and Meta report between Wednesday and Thursday, and together account for about 18% of the S&P 500. Their results will test the AI trade after months of heavy capital spending. Strong numbers could steady risk appetite after the Fed, while weaker results would leave markets more exposed. In that scenario, the dollar could stay bid from multiple fronts, with real rates pressing higher and haven demand rising on any earnings disappointment.
EUR: Oil swings, EUR rates follow
The past few days have been yet another reminder of how sensitive euro rates are to swings in oil prices. Markets went from pricing a full 25bp ECB hike in September last Thursday to assigning less than a 90% probability today, as oil prices fell on renewed peace prospects.
Interestingly, market pricing for the Fed’s tightening bias has consolidated around a fully priced September hike. These moves reinforce our view that Fed tightening expectations remain stickier than those for the ECB, regardless of oil volatility, reflecting the more resilient US macro backdrop.
That is not to say we expect significant EUR/USD downside in the near term. Markets are pricing close to two Fed hikes this year, but we continue to favour the view that the Fed remains on hold through year-end. Any unwinding of those expectations should provide support for the pair.
Meanwhile, the latest pause in hostilities between the US and Iran reinforces our view that any flare-up in violence is likely to be temporary and contained within a broader path of negotiations. That helps explain why EUR/USD has remained broadly range-bound this month despite the US-Iran standoff, trading largely within the 1.1350-1.1450 range.
We retain a mild bias for EUR/USD to move back into the 1.14 handle more comfortably as we suspect this week’s Fed meeting fails to signal any urgency around a September rate hike.
GBP: Soft on sour sentiment
Sterling remains under pressure despite a modest easing in Middle East tensions and lower oil prices. Under normal circumstances, both developments would be supportive for the pound. However, the improvement in the energy backdrop is being offset by fragile risk sentiment, with the latest unwind in AI-linked equities weighing on broader markets. South Korea’s Kospi index has fallen more than 10% overnight, while Asian equities are sliding towards correction territory, limiting demand for risk-sensitive currencies such as GBP.
Technically, the picture has softened. GBP/USD remains below all major daily moving averages, with momentum pointing towards the 1.32 area as the next downside target. GBP/EUR has also lost traction, slipping back below its 21-day moving average and under the 1.17 handle after failing to sustain last week’s one-year highs.
This Thursday’s Bank of England meeting is a key domestic risk event. Interest rates are widely expected to remain unchanged, but the debate centres on whether support for tighter policy broadens within the MPC. While higher energy prices remain an upside risk to inflation, we expect updated forecasts to show CPI peaking comfortably below 4%.
In our, view, this means the risks are skewed towards a dovish repricing. Markets are still pricing around 38bp of tightening by year-end, and any pushback from policymakers could undermine one of sterling’s key sources of support.
For now, softer risk sentiment and growing doubts over the extent of future BoE tightening leave sterling vulnerable.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: July 27-31
All times are in BST
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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.
