- Near-term market moves have been driven mainly by the Israel-Iran conflict. The combination of rising geopolitical risk and oil prices temporarily re-established some safe-haven appeal for the US dollar.
- But oil retreated on news from the White House that President Trump will decide on whether to order direct strikes on Iran within two weeks, which eased immediate escalation fears and capped the dollar’s rebound.
- Still, the Mideast tensions represent another adverse shock to an already weak global economy. A significant surge on oil prices could persuade central banks to postpone further rate cuts to minimize the risk of second-round inflation effects emerging.
- Talking of central banks, the Federal Reserve kept interest rates unchanged for a fourth consecutive meeting, maintaining a cautious stance as it waits for more clarity on the economic impact of the Trump administration’s evolving policy agenda.
- The Bank of England held rates steady at 4.25%, as expected, and gave little signal it’s ready to accelerate easing — despite the sharp deterioration in jobs data and the fading UK growth story.
- But elsewhere in Europe, dovish winds swept, with interest rate cuts from Switzerland, Sweden and Norway – as policymakers attempt to pre-empt the economic fallout from Donald Trump’s unpredictable trade agenda.
- Overall, though, the short-term dominating driver of risk sentiment and market volatility remains geopolitics and oil prices.
Global Macro
Between Geopolitics and Central Banks moves
Policy easing meets global tension. Six G10 central banks held policy meetings this week. The Fed, BoE, and Bank of Japan kept rates on hold as expected, while the Riksbank joined the Swiss National Bank with a 25bp cut. The real curveball came from Norway, which pivoted toward easing. These Europe-centric cuts are unfolding against a July 9 deadline that could see the US reimpose punitive global tariffs. Coupled with continued uncertainty surrounding the war in Ukraine and the risk of a US strike on Iran, the three European central banks appear to be signaling scope for further rate cuts.
Oil in focus. Recent Israeli-Iranian clashes have typically been brief, but this time Israel seems determined to involve the U.S. and may be succeeding, with media reporting American military action looms and President Trump’s latest social media post hinting at growing U.S. readiness; markets responded swiftly, with WTI crude climbing back to $77 per barrel, its highest level since past January.
Hawkish Fed returns. Fed left rates unchanged for a fourth consecutive meeting, maintaining a cautious stance amid uncertainty over the economic impact of the Trump administration’s shifting policy agenda. The median inflation forecast for end-2025 was raised to 3% (from 2.7%), while growth was cut to 1.4% (from 1.7%), flagging stagflation risks. Chair Powell’s comments on tariff-driven inflation revived a hawkish tone, previously softened by a stretch of weaker jobs and price data.
Fear is back, so is the USD. For the first time since Liberation Day, safe-haven dynamics have resurfaced: the VIX has jumped to 22, well above its 10-year average of 18.5, prompting a pullback in equities, falling U.S. Treasury yields, and a 1% rise in the dollar, which is now back above its 20-day moving average of 99.
Regional outlook: UK
No shift, just signals
Cooling jobs market. UK data flow has been weak of late. Wage growth now looks set to undershoot the BoE’s May forecast, and unemployment has already hit levels previously expected for end-Q2. A 109k drop in PAYE employees in May and a vacancies-to-unemployment ratio well below the BoE’s neutral benchmark further weaken the case for holding rates purely on labour tightness grounds.
Inflation offers a mixed picture. May’s UK inflation report was published on Wednesday and revealed headline consumer price index (CPI) came in at 3.4% versus a forecast of 3.3%. Core CPI came in line with expectations at 3.5% though services CPI came in below forecast. A sharp rebound in goods prices back above 2% was also evident.
Retail sales slump. Meanwhile, a big miss on retail sales data adds to the weaker UK consumer narrative and the deteriorating economic backdrop.
Dovish vote split. The Bank of England (BoE) held rates steady at 4.25%, as expected, and gave little signal it’s ready to accelerate easing — despite the sharp deterioration in jobs data and the fading UK growth story. But rather than an expected 7-2 vote split, three MPC members voted for an immediate cut, prompting some speculation of a dovish turn.
Oil price risk. Markets slightly added to easing bets, pricing in an 85% chance of an August cut and 50bps of easing by year-end. However, it should be noted that oil prices have surged over 20% this month, and while this hasn’t materially altered near-term inflation expectations, the UK is particularly vulnerable as a net energy importer. This is why we think the BoE will retain its quarterly cutting tempo.
Week ahead
Stagflation watch
Inflation in focus. Personal Consumption Expenditures—the Fed’s preferred inflation gauge—are due next week. Prices are expected to edge higher amid Trump’s inflationary trade stance, and with policy firmly in data-dependent mode, any upside surprise could reinforce the Fed’s recent hawkish messaging.
Growth check. The third estimate of U.S. Q1 GDP also lands next week. April’s revision nudged annualized q/q growth from –0.3% to –0.2%, but a confirmed contraction would underscore a sluggish start to the year, as policy uncertainty weighs on confidence and investment—leaving the Fed navigating growing stagflation risks.
Eurozone signals. Flash PMIs will also be pivotal, particularly for the ECB, as it weighs further rate cuts amid an uncertain growth-inflation trade-off, now with rising geopolitical tensions fueling stagflation concerns across the region. Germany shows signs of a manufacturing trough, but services momentum is fading; France remains under pressure from weak demand and political uncertainty, while Spain continues to outperform. Overall, euro area growth remains sluggish, weighing on the ECB’s more recently firmed hawkish tone.
Sentiment snapshot. The Conference Board’s confidence print will help clarify the direction of consumer sentiment. Recent data showed improvement—University of Michigan’s current conditions and expectations rose, while inflation expectations eased. NFIB small business optimism also climbed, suggesting early signs of broadening resilience.
FX Views
Cues from crude
USD Dancing to oil’s tune. The reduced likelihood of a US strike on Iran this weekend gave FX markets room to reload USD short positions, particularly against European peers. It underscores that, in an environment tilted toward structural dollar selling, only a steady stream of oil-driven risk aversion can keep the greenback supported. Since the US became a net oil exporter in 2019, higher crude prices now improve America’s terms of trade, supporting the dollar rather than hurting it. So, the over 20% rise in oil prices in a week had supported the buck, while the rebound in sentiment was also reflected in the options market, where, for the first time since April, traders backed off from bearish dollar positions. The Fed was also in the spotlight this week, maintaining a cautious stance on easing, which helped buoy the high yielding dollar, but the reality is oil prices, and the Middle East conflict remain the number one driver for FX markets. Hence, the easing fears of an immediate escalation have capped the dollar’s rebound.
EUR Geopolitics, growth fears, and the euro’s slide. The euro’s weekly trajectory was shaped by a volatile mix of geopolitical strain, central bank signaling, and shifting market sentiment. The currency initially extended its prior rally above the $1.16 handle, buoyed by hawkish rhetoric from ECB officials. However, the momentum reversed midweek as the euro slipped back into the $1.14 zone. A resurgence in safe-haven demand for the dollar, fueled by escalating geopolitical risks and spiking energy prices, weighed on EUR/USD—particularly given Europe’s status as a net energy importer. While strong ZEW sentiment data from Germany hinted at improving domestic confidence, eurozone fundamentals remained subdued, with industrial output contracting. By week’s end, the macro narrative was dominated by a wave of dovish moves across Europe, as Switzerland, Sweden, and Norway all cut rates within a 24-hour span. This collective action underscored broader concerns around growth headwinds and trade uncertainty. In short, the euro’s pullback this week reflects a repricing of geopolitical risk, renewed dollar strength, and growing divergence in global policy paths—with central banks across Europe easing just as the Fed doubles down on its hawkish stance.
GBP Challenging landscape ahead. Aside from geopolitics driving FX, the dovish BoE hold and string of soft UK data has weighed on the pound of late, as its yield advantage looks primed to rode further. GBP/USD pulled back sharply from 3-year highs above $1.36 and broke below its 21-day moving average in a sign that the uptrend is losing steam. The 50-day moving average, located at $1.3381, has acted as decent support though as the pound attempts to rebound with global risk sentiment. But sterling’s vulnerability to external shocks, such as rising oil prices, coupled with weak domestic data flow, reinforces our more cautious GBP stance in the short term. As for GBP/EUR, the pair continues to grind lower, down over 2.3% since its late May high of €1.1966 and recently recording its longest daily losing streak since the depths of the pandemic. The currency pair is now trading below all its key daily and weekly moving averages. Holding above €1.17 will be crucial or else an extended slide towards €1.16 or lower before month-end could be on the cards. Still, although a stronger euro would drag on GBP/EUR, it might bode well for GBP/USD – that is if EUR/USD, the most liquid and widely traded FX pair, scales higher.
CHF No yield, no problem. The Swiss franc continues to trade less like a conventional currency and more like a strategic portfolio diversifier — much like gold. Despite the Swiss National Bank (SNB) cutting its policy rate to zero, the franc remains the haven hero. The SNB did signal openness to further easing, but the currency’s reaction underscores that rate policy is not the primary driver for CHF. Indeed, it was SNB President Martin Schlegel’s press conference, rather than the policy statement itself, that moved markets. While Schlegel left the door open to sub-zero rates, he emphasized that such a decision would not be taken “lightly.” This tone helped unwind some of the more aggressive easing bets that had been priced in, sending CHF higher against the euro in the aftermath. The broader backdrop remains supportive for the franc. Its safe-haven appeal and diversification characteristics continue to underpin a constructive outlook, even in the face of dovish policy signals.
CAD USD pushes Loonie towards 1.37. The Canadian dollar pulled back as traders digested a more hawkish tone emerging from the Federal Reserve’s updated ‘dot-plot’ projections. With Fed officials signaling a firmer commitment to keeping interest rates elevated, the greenback gained ground throughout the week. This renewed strength in the US dollar acted as a cap on the USD/CAD pair, preventing any sustainable breakout beyond the 1.365 level. Meanwhile, sentiment in the FX options space has taken a noticeable turn in the last couple of weeks. Traders have reduced their bullish bets on the Loonie, with positioning shifting to a more neutral stance, an indication of growing caution amid shifting macro signals. As the market recalibrates expectations around US monetary policy, Canadian dollar bulls are treading more carefully. In FX, the Canadian dollar has rebounded, moving back above its 20-day moving average of 1.37. This recovery comes after a drop to 1.354, its lowest point since last October, bouncing from oversold levels. What’s more, the CAD has returned to a long-term upward support line that’s been in place since 2021, adding further weight to 1.37 as a key support/resistance level to watch in the near term. Short-term movement in the CAD will likely be influenced by any escalation or de-escalation in the Israel-Iran conflict, as geopolitical tensions are leading market sentiment. Additionally, Canada’s upcoming May CPI report could be another important catalyst for price direction.
AUD Employment miss weighs on Aussie. Australia’s May employment data disappointed, with a 2.5k decline in jobs versus expectations of a 21.2k increase. The unemployment rate held steady at 4.1%, but a sharp 41.1k drop in part-time jobs offset a 38.7k gain in full-time employment. This weaker-than-expected labor market data pressured the AUD, pushing AUD/USD lower. AUD/USD briefly touched the two-week low. Market is currently pricing in 80% likelihood of July rate cut. Technically, AUD/USD remains capped by the 0.6535-0.6550 Fibonacci resistance zone, while support near 0.6400 continues to hold. The pair’s inability to break higher suggests a potential topping pattern, with the 50-day (0.6436) and 200-day (0.6424) EMAs acting as key support levels to watch. Looking ahead, traders will focus on Australia’s Judo Bank PMIs and monthly CPI data, which could provide further direction for the AUD. A weaker CPI print may reinforce downside risks for the currency.
JPY BoJ dovish tone keeps USD/JPY above 145.00 mark. Bank of Japan (BoJ) Governor Kazuo Ueda emphasized the need for flexibility in bond purchases, citing market pressures and rising yields. While Ueda acknowledged moderate economic recovery, he highlighted downside risks to growth and inflation, reinforcing the BoJ’s dovish stance. USD/JPY remains range-bound, trading below the 148.39-148.70 resistance zone and above the 141.97-142.36 support area. USD/JPY is trading above its 50-day average of 145.05 and could push higher if the dollar gains traction. The next resistance sits near 200-day EMA of 148.47. On the flip side, the 140.00 mark remains a key level to watch on the downside. Upcoming data, including Tokyo CPI, unemployment figures, and the BoJ’s summary of opinions, will be closely monitored. Any signs of persistent inflationary pressures could challenge the BoJ’s dovish stance.
CNY Retail sales shine. China’s May retail sales surged 6.4% y/y, beating expectations of 4.9%, supported by the Golden Week holiday and e-commerce discounts. However, industrial production (6.3% y/y) and fixed asset investment (3.7% y/y) fell short of forecasts, while property investment contracted further, reflecting ongoing structural challenges. From technical lens, USD/CNH continues to hover below the 7.20 level. The pair appears to be testing the upper descending channel. The next key resistance levels will be the 21-day EMA of 7.1930, followed by 50-day EMA of 7.2156 and 200-day EMA of 7.2373. Market participants will keep a close eye on upcoming Chinese industrial profit data and any policy signals from Beijing. Investors will watch for signs of additional stimulus measures to support growth, as weak investment and property data could limit the yuan’s recovery potential in the near term.
MXN Peso drops 1% in the week. The Mexican peso lost 1% this week, slipping toward 19.1 per dollar after peaking at a ten-month high on June 12. Still, it’s up around 9% for the year, thanks to strong foreign demand for local assets that have outperformed U.S. fixed income. The Fed held rates steady at 4.25–4.50%, and Powell’s warning that new tariffs could fuel inflation pushed the dollar higher, especially with rising geopolitical tensions between Israel and Iran driving investors toward safe-haven assets.
While momentum for the peso may be fading, it continues to trade below its 20-day moving average of 19.13. This sustained position, held through much of Q2, reinforces technical support for USD sellers in the current price range.On the macro front, according to Mexico’s national statistics agency, INEGI, the country’s industrial output took a sharp dip in April 2025, down 4% compared to the same month last year, marking the steepest drop since February 2021. That downturn came right after a relatively strong showing in March, when output grew by 1.9%. The biggest hits came from manufacturing and construction. Manufacturing activity shrank by 2.6% after a 3.1% boost in March, while construction tumbled by 6.8% after a 5.4% jump the previous month. Other sectors didn’t escape the slowdown either—public utilities dropped 1.7%, and mining was down 4%, though that was actually a smaller decline than March’s 9.5%. Looking ahead, Banxico is expected to trim its benchmark rate from 8.5% to 8%, which could chip away at the peso’s carry advantage. On top of that, fresh U.S. tariff threats on key Mexican exports are adding to the uncertainty.
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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.
