USD
The dollar firmed on Monday as Middle East risk dominated, with thinned Hormuz shipping traffic sending briefly above $90 before settling near $89. That left the to probe 101 before easing marginally, as the stagflationary impulse drew haven flows into the buck and markets pared the modest Fed easing that a lukewarm jobs report had briefly priced. With the Fed now in blackout before next week’s July 29th decision and a sparse US calendar, the dollar stays hostage to oil and Gulf headlines: US strikes are now in their tenth day, and the Houthis have declared an embargo on Saudi shipping, yet mediator proposals and talk of a 10-day truce pull the other way. As we flagged Friday, the chance of a July hike remains marginal, with September odds near a coin flip. We still see medium-term dollar risks lower as US growth cools, even as the energy premium caps the near-term downside.
EUR
slipped to the low 1.14s against a broadly firmer dollar yesterday, unable to make headway with the Governing Council in its pre-decision quiet period. Today brings Germany’s ZEW survey, seen at 15.3 and the first hard confidence read since the renewed Hormuz flare-up, with the ECB’s Bank Lending Survey also due this week ahead of Thursday’s rate decision. We continue to think this policy meeting comes too early for another move. Our focus instead falls on whether President Lagarde keeps a September hike alive. A sustained Hormuz closure would firmly support that, and with it the euro’s rate leg, though near-term the terms-of-trade squeeze keeps the balance of risks tilted lower at present.
GBP
experienced a choppy start to the new week as Andy Burnham formally took office as Prime Minister. Markets initially welcomed the orderly, uncontested handover, before reports that Burnham would seek “flexibility” within the fiscal rules took the pound sharply lower. The surprise announcement of John Healey as Chancellor helped partially repair the damage, but even so, the episode serves to highlight how sensitive sterling remains to the UK’s fiscal challenges. In contrast, this morning’s labour market report has done little to move the needle, broadly matching consensus expectations. That should keep attention squarely on domestic politics ahead of tomorrow’s June CPI report. Given our call for a softer-than-expected headline inflation print, we retain a downside bias pending more detail on the new government’s likely fiscal priorities.
CAD
The loonie softened notably on Monday as June CPI numbers underwhelmed consensus. Headline inflation eased to 2.8%, below the 2.9% expected, and fell 0.4% on the month, while the Bank of Canada’s core measures slid to five-year lows, reinforcing the view that the Bank, which held at 2.25% for a sixth time on 15 July, is done tightening. duly firmed to end the session trading back toward 1.41. With the domestic calendar now bare, USDCAD is now hostage to oil prices, risk conditions, and trade concerns. This latter factor is top of mind after events overnight, with President Trump reportedly imposing a 50% tariff on a range of Canadian goods, and CUSMA uncertainty a further weight after Washington declined to renew the pact as it stands. We expect the pair to hold around current levels for now, with a resolution of trade tensions, or a paring back in Fed easing bets needed for the pair to resume its prior slide.
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